Budget 2017: Mkt to watch out for corporate tax, LTCG changes, says Edelweiss

Strong domestic flows are helping to hold up the market but Budget could be the next big trigger, says Vikas Khemani, President and CEO at Edelweiss Securities in an interview to CNBC-TV18.

Foreign outflows, though a cause for concern, are more technical than fundamental, Khemani says.  Since India was on top of most emerging market portfolios so far, it was natural to take the first hit in case of any global uncertainties, he noted, adding, a favourable Budget can reverse the trend.

Khemani does not see any major disappointment from corporate earnings yet. The market is keenly watching changes in corporate and long term capital gains taxation in the Budget and will certainly cheer if these are constructive, he says.

Among sectors, he is positive on select companies in consumer staples, discretionary, private banking sector and BFSI spaces.Below is the verbatim transcript of Vikas Khemani's interview to Sonia Shenoy & Anuj Singhal on CNBC-TV18.Sonia: What are you feeling about the market because lots of positives this morning whether it is that Foreign Portfolio Investors (FPI) circular being put in abeyance and even the Dollar Index falling? What do you think is the most important trigger for the market for sustenance of this upside?A: I think we are in a situation where there are lot of global uncertainties and locally we have a Budget, which is coming and one of the big reason market is holding of is there is domestic flow. So, you have seen foreign institutional investors (FIIs) selling and domestic flows are very strong and that is the reason market is holding. Some good positive cheer is expected from the Budget. Dollar rally halting only adds to the pleasure. So, I think till Budget market seems to be in a sort of steady zone and we have so far earning season panning out pretty well. We do not see major disappointments coming through.So I think we are in a good time period, time zone and any surprise which comes from international front could spook markets. However, good part is that, we have fairly sort of sustainable domestic flow to take care and that kind of gives you good feeling. So now market is looking towards Budget. If we end up having a good Budget, which is boosting towards economic growth then we will probably see sustenance of this momentum.Anuj: We have underperformed as a market, forget about the developed markets, we have underperformed emerging markets something that we are not used too at Index level of course. Do you see any kind of catch up, especially if the Budget is good?A: It could be definitely the case. One of the big reasons for underperformance vis-à-vis other markets was India was overweight on every large emerging market portfolio. Whenever, there is an outflow the overweight country would take the biggest amount of hit and that was a one. So, in some sense it was more technical reason than a fundamental reason. However, that is the reality.I do feel that if you are getting a support from domestic flows and emerging market outflows are halting or reducing then you have fairly good chance at catching up with this underperformance. If we can see a good momentum coming from Budget and corporate earnings definitely this can get reversed soon. So, a lot depends on how things pan out.Sonia: You said that you are expecting some positives from the Budget. What are these positives because there doesn’t seem to be too much government funding at this point in time for big infrastructure spending or even for reducing taxes in a big way. What is your own expectation this time?A: Two major expectations or two major things market would look out -- one is on the taxation front where how the Finance Minister (FM) keeps the promise of reducing the corporate tax rates and increases the individual slabs or effective tax rate basically. That is one big part everybody would watch out and in that how long-term capital gains (LTCG) tax is dealt with because that has created some sort of uncertainty in the recent past. So, I think these are the couple of things which we will look out for. If FM manages to walk little bit away on this either on reducing the corporate tax rate and keeping the long-term gain intact, it will create a good cheer in the market.Secondly, the tight rope walk he has to do is managing the fiscal deficit versus boosting the spending in the economy. There is definitely a need for spending momentum in rural side of the economy. There is definitely a need for kind of putting more money in the hands of consumer because demand has been sort of slow to come by. This is the time which is required, so some measures could be there.On housing side, there could be good boost coming through. Some schemes were announced on interest rate subvention by the Prime Minister on December 31st. You could see some more detailed sort of version of that out. So, market would watch out for what kind of sort of investment boosting, consumption boosting measures are been taken by the government. We will have to take it forward from there.Key thing would be there should not be major negative to derail the story and if there could be little bit of more enabling for putting the economy on the faster growth trajectory.These are the two things market would watch. Other than that I don’t think this Budget could be a major game changer from a direction point of view.Anuj: How would you construct a portfolio from hereon because it has been a stock specific market we can talk about Index all through the 12 months and the fact is that it has not moved over two or three years period, but lot of midcaps have moved on so what is your call in terms of creating a good portfolio now?A: That doesn’t change much, we continue to believe that India growth story will come back, it is going to accelerate and you will see domestic oriented stories would do well whether it is consumption or investment. Now we have clarity of GST implementation, so we will definitely see a shift happening from unorganised to an organised and a major revamp of the whole tax structure. You will see many sort of space between consumer discretionary and consumer staples doing very well. That basket definitely looks pretty good.On the investment side, you will definitely see companies, which are in the middle of the creating so much of capital expenditure be it in railways or roads or urban infrastructure like metros would definitely be big beneficiary of that and they would provide the market leadership. Banking would continue to do well. In the shorter term probably private sector bank will do well because till the time we get clarity on the asset quality, credit growth is easy to combine private banks and hence they would remain flavour.However, some point of time PSUs will come but overall BFSI as a basket would also kind of do well. So, within in these two-three segments one has to keep constructing portfolio. The key thing is that wherever there is a confidence of earnings growth continuing and sustaining, markets would reward those place and we have seen that happening last year and that will continue this year.Sonia: Do you think the market has its steam to run its own marathon this year?A: Indian market are like running marathon, you can’t make money in shorter-term. I think there will be disappointments along the way, there will be pains in our bodies along the way, so we will have to bear that and continue. Market, I continue to believe that if you take a 10 year view Indian gross domestic product (GDP) will grow from USD 2-5 trillion and that is the marathon we are running. In that along the way you will see serious amount of wealth getting created, so hence I would say patience is the game and endurance is the game like marathon Indian market as well.