MC Interview | FM may focus on tax regime enhancement, says this smallcase manager

Interim Budget 2024 to be held on February 1

"As the interim budget approaches, with elections on the horizon, significant policy shifts are unlikely," says Karthick Jonagadla, smallcase Manager, Founder, and CEO of Quantace Research, in an interview with Moneycontrol.

He further expects the Finance Minister to focus on enhancing the new tax regime's appeal, potentially through provisions for additional tax savings and an increase in the standard deduction. "These measures could make the new regime more attractive compared to the old, influencing taxpayer choices," said Jonagadla.

With a rich experience of more than 12 years which includes quantitative research, Jonagadla says he is avoiding the private banking sector, anticipating heightened volatility over the next 2-3 months.

Is the market yet to be overstretched in terms of valuations and what could be the triggers in the short to medium term?

The market's current valuation, with Nifty's Trailing 12 Month PE at around 23.1, slightly above the 24-month average of 21.6, suggests valuations are somewhat stretched but not alarmingly so. In the short to medium term, the primary catalysts are anticipated to be the unfolding quarterly results season, which has just commenced.

Related stories

Karthick Jonagadla

Founder & CEO|Quantace Research

Additionally, the upcoming Budget and evolving geopolitical scenarios, particularly in the Red Sea and Middle East regions, are likely to significantly influence market trends. Overall, while valuations are slightly above average, they remain within our comfortable range, with key events on the horizon poised to shape market directions.

Which are the themes on your radar for investment, and why?

Our investment focus is centered around "The Bharat Story," a narrative driven by demographic dynamism, strategic policy reforms, technological innovation, and infrastructural development. India's youthful population is not just a demographic feature but a catalyst for economic growth, driving consumption and innovation.

Also read: Ahead of Budget, IMF raises India's FY25, FY26 GDP growth forecasts to 6.5%

Key investment themes in the short to medium term include:

Public Sector Undertakings (PSUs): We prefer it for stability and consistent dividends. They offer a unique blend of security and growth potential, reflecting India's developmental priorities.

Infrastructure Development: Investments in infrastructure are essential to India's growth narrative, enhancing trade connectivity and urbanization.
Defence: In addition to the previously mentioned themes, the defence sector in India for the next 5-6 years presents a significant investment opportunity.

With the government's commitment to self-reliance and increasing defense spending, this sector is emerging as a key area of growth. India's focus on bolstering its defense capabilities, including areas like aerospace, cybersecurity, and defense manufacturing, aligns with global geopolitical shifts and the need for enhanced security measures.

Do you expect the interim budget to be a bit of game changer for the equity markets in near term? What do you expect the budget?

As the interim budget approaches, with elections on the horizon, significant policy shifts are unlikely. The expectation is that the Finance Minister will focus on enhancing the new tax regime's appeal, potentially through provisions for additional tax savings and an increase in the standard deduction. These measures could make the new regime more attractive compared to the old, influencing taxpayer choices.

Also read: Budget 2024: Do budgets impact market trends?

While these changes are modest, they might have a subtle, positive impact on the equity markets by potentially increasing disposable income and consumer spending. However, given the nature of an interim budget, major game-changing announcements are not anticipated. The emphasis is likely to be on fiscal prudence.

Will it (2024) be the year of banking space? In addition, do you see any growth concerns for the NBFCs, especially after recent RBI moves?

In 2024, the banking space might not be the primary focus in the short term due to expected volatility. Recent RBI regulations, particularly impacting NBFCs, have introduced a significant shift. The ban on NBFCs using AIFs for loan evergreening aims to curb risk-concealing practices and enforce greater transparency. This rule is crucial in maintaining genuine asset quality, revealing the actual financial health of these institutions.

Moreover, RBI's move to align HFC regulations with NBFCs, especially regarding liquid asset maintenance and deposit rules, indicates a trend towards tighter regulatory control. These changes, while beneficial for long-term sector stability, could lead to short-term challenges like tightened liquidity for some NBFCs, potential widening of credit spreads, and higher borrowing costs.

Given these dynamics, a cautious approach towards the banking and NBFC sectors seems prudent in the near term, as we navigate through the evolving regulatory landscape and assess the broader market implications.

Are you taking exposure in the technology space that saw sharp run up after a long time?

In the technology space, we're selectively avoiding large-cap IT names, instead focusing on Midcap and Smallcap IT stocks. Our preference leans towards these smaller companies, as we believe they hold greater potential for outperformance compared to their large-cap counterparts.

Which are the sectors that you want to avoid or stay away now?

Currently, we are steering clear of the Private Banking sector, anticipating heightened volatility over the next 2-3 month.

What is your high alpha-generating strategy?

Our strategy is centered around sophisticated quantitative methods, meticulously designed to adapt to prevailing market trends. The cornerstone of our approach is an unwavering commitment to robust risk management. We diligently maintain the risk exposure of our investment baskets within predefined, comfortable limits. This focus on risk control plays a pivotal role in our strategies.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.