Volatile year ahead but India growth story still intact: UTI MF

Changes in tax laws, if unfavourable, could be a big spoiler for foreign institutional investors (FIIs) in India, says Lalit Nambiar, Fund Manager and Head of Research of UTI MF.

Speaking to CNBC-TV18 he said Theresa May's speech later today may prove to be a negative trigger for markets.

It is going to be a volatile year and in the near term we are keeping an eye out for the Union Budget, Trump Presidency and the impact of Brexit. But in India, things continue to look good in terms of macro fundamentals, he said.

Economic growth may have been pushed back a little due to demonetisation and the goods and service tax (GST) may disrupt further but overall the India growth story remains intact, he said. Below is the verbatim transcript of Lalit Nambiar’s interview to Prashant Nair & Ekta Batra on CNBC-TV18. Prashant: We got numbers, lots of finance companies including some private banks, smaller private banks have reported earnings? Would you sort of look at those and say the larger private sector banks will also do as well? A: It is little difficult to extrapolate because we have seen a few private sector banks giving results almost as if they weren’t even part of the economy. The trends are quiet disparate, so it is a little difficult to extrapolate from one to the other. Broadly, it does look like the trends will be similar. Having said that there was a few positive surprises at one part of the banking sector. One of the better known retail banks having done quite well, so it is little difficult to extrapolate. We will have to wait and see. Prashant: One obvious things which comes to our mind when one looks at what has reported which is smaller financials compared to some of the larger franchise names is that because of the kind of effort which bank officials had to undertake because of demonetisation, cash exchange etc the larger franchises would be more involved there on the liability side, liability customers, so that would have given the opportunity for some of the smaller players to grow? A: That is a reasonable surmise that a lot of bandwidth from the top management all the way down would have been taken up if you were larger branch network. Having said that I think some of the leading players don’t seem to have been impacted so much. So, as I said it is a little difficult to really figure out which way it has headed whether you can actually boil it down to any particular trend. I would think that most of these banks are well equipped in terms of their distribution networks, but some of them have performed well in the niches they occupy and being retailed hasn’t hurt them for instance in some cases. So one would have expected that larger network of branches would actually hurt, some of these banks would surprisingly some of them have done quite well. Ekta: We have just a couple of days to go ahead of the Budget and a lot of the experts are pecking the fact that maybe foreign institutional investors (FII) flows could turn around if there is some clarifications that comes in with regards to that triple taxation issue from the FIIs table as well as maybe with equities etc. Your sense in terms of whether that would be the key point that you would be watching out for in this Budget? A: The larger trend or the bigger trend within the India flow picture is the EM to DM trend and within that obviously if you have tax laws changing they could be a bigger spoiler. So, I think that is the way I would look at it. If there is jarring note in the Budget with respect to FII investment or how their profits are treated obviously, it is going to exacerbate the trend of outflows which we have seeing. Having said that I think the bigger trend around EM to DM will matter more in the coming months and what the Trump presidency really means for global markets, for global trade, for US interest rates, for the differential between Indian and US interest rates I think those will matter more than immediate actions being taken by the government. Of course, if the tax laws are not very friendly, obviously there is going to be a sharper reaction. It is a little difficult to surmise as to how exactly they would react because it is based on what exactly are the measures taken in the Budget. My sense is that this government is unlikely to take any drastic measures with respect to investments. There is some confusion regarding certain notifications issued by the income tax authorities, so that is probably you will see the Budget clearing the air on those. Prashant: Just to stick with IT there, so far when we talk about IT with regards to what may happen out of the US one is focused on cost of H1B visas, import employees on H1B visas are paid etc. There is also the border tax issue which Donald Trump has repeatedly said – more and more people now believe that IT services would also face that border tax issue. Donald Trump has said 35 percent is the border tax which he plans to impose. Have you done any work spoken to people in the industry etc about what this could mean for Indian IT services? A: We are still working on that one, I am not too sure about this. Prashant: What is on top of your mind in terms of investment themes and ideas at this point? A: Obviously, in the near-term, we are concerned, we are watching the Budget, we are watching the Trump presidency and what it could mean. We are looking at Brexit happening sometime later. Well it is going to be hard Brexit I believe, today later in the day you will have the British Prime Minister talking about a possibility of a hard Brexit and that is going to impact markets possibly. Then you have later on in the year you have the goods and services tax (GST), so it is a volatile year I would say going forward. However, India continues to like good in terms of macro fundamentals. Things have got pushed back a little, recovery could have got pushed back a little because of demonetisation. Perhaps GST will also have some kind of disruption but overall I don’t think the story changes. The relative story of India remains while there are lot of people who worry about a next six months. I think the equity markets are more about a 12-18 months view. We continue to be pretty positive there. We are looking at cyclical recovery themes and that is why we prefer to play sectors such as cement, industrial manufacturing, auto and that is where we would like to be overweight. Ekta: Are you expecting maybe a rural push in the Budget? A: That is what we have heard, so the narrative seems to be that there will be more income being put in the hands of people in agriculture in the rural areas. There is talk about in three years raising the farm incomes three times. So, if all of that is to be believed we understand there is some push in rural housing, there is a possibility that it could get infrastructure status. So, all of that means quite a bit of money hopefully in the hands of the rural consumer and more confidence for him. So, that is a great thing.