Investors expect more policy measures: Citi India's Abhinav Khanna

Abhinav Khanna, head of equity at Citi India, expects emerging markets (EMs), and India in particular, to see higher allocation by foreign investors over the next 12 months

Global investors have been keenly watching the policy measures being unveiled in India over the past few weeks. Abhinav Khanna, head of equity at Citi India, tells Puneet Wadhwa that he expects emerging markets (EMs), and India in particular, to see higher allocation by foreign investors over the next 12 months. Edited excerpts:

1) How do you view the recent policy announcements by the government?

The corporation tax cut was by far the most significant. It had an immediate positive impact on earnings per share (8-9 per cent at a headline level FY20 onwards, ceteris paribus). This step makes Indian corporates even more competitive in the global landscape and will attract more multinationals as well as foreign direct investment (FDI).

2) Are they enough to fire up the consumption cycle and kick start economic growth?

Any pick-up in the consumption cycle will be a second-order effect of these changes, and could be further aided if corporates pass some of these benefits on to the end consumer in terms of price cuts/discounts to spur demand. From a timing perspective, it is good that these proposals have come when we are entering the festive season and will also benefit from the low base effect. 

We are building in a sequential pick up in gross domestic product (GDP) for the rest of the year i.e. Q2 onwards through Q4. We have had multiple investor meetings and conversations with both foreign portfolio investors (FPIs) and domestic institutions (DI) since these policy announcements. The feedback has been positive and investors expect the government to follow through with other measures, particularly in regards to land reforms and personal income tax rate cuts.

3) Are the markets prepared for a deterioration in fiscal deficit?

Our view is that the risk of fiscal slippage is relatively less as revenue foregone from corporation tax cuts could be lower than the initially expected Rs 1.45 trillion (0.7 per cent of GDP). Accordingly, the government could manage to stay close to the 3.3 per cent-of-GDP fiscal deficit target. For that to happen, the divestment process would need to be fast-tracked and we should see some sequential improvement in tax revenue collection. Even if there is a small fiscal slippage, it could be financed through small savings that are accruing at a higher rate than budgeted. 

4) What are the key concerns of FPIs?

In a low/declining interest rate environment, the easing by one country's central bank increases the likelihood of easing by another, causing a global tit-for-tat. As per our global credit strategist, we doubt this will do much for the economies, but it seems highly likely to trigger a renewed boom in asset prices. In that scenario, risk appetite would pick up and, in my view, EMs, and India in particular, would see higher allocation by foreign investors over the next year. Key concerns include the risk of a recession, the unresolved US-China trade war, a further delay in the resolution of asset quality and non-banking financial company (NBFC) liquidity situation, no economic recovery, and the absence of multiplier effect despite government measures. 

5) Have the markets run ahead of fundamentals?

The move of the market since Friday (September 20) largely factors-in the EPS upgrades, as a result of the corporation tax rate cuts, and valuations remain rich. Our March 2020 Sensex target of 40,500 is benchmarked off 18x March 2020 earnings.

6) Your FY20 earnings growth estimates? 

For FY20, we have 15 per cent and 19 per cent earnings’ growth for the Nifty and the Sensex, respectively (excluding recent tax impact). The sectors expected to lead this growth are financials and healthcare. The materials and energy sectors are likely to be the biggest laggards.
 

7) Is it time to look at the mid- and small-cap segments?

We are selectively positive in a few names across different sectors. If there is a pick-up in consumer demand during the festive season and the resolution of financial system stress happens, investor risk appetite will go up. In that case, the confidence to buy mid-caps and small-caps, which went up a bit after the corporation tax cuts, will get further reinforced.

8) How should investors play the rate sensitives now?

Going forward, greater focus will be on the transmission of past rate cuts and the monetary policy committee (MPC) will be cognizant of the lag with which monetary policy operates. Overall, another 50 basis point (bps) cut till March 2020 could take us closer to the terminal rate, where the MPC could pause to reassess the impact of the cumulative cuts done. Within the rate sensitives, from an equity strategy perspective, we have a large overweight on financials; we are underweight on autos. On the financial services sector, within our overweight, we prefer large private banks and life insurance stocks. Public sector banks (PSBs) and NBFCs are much lower in the preference order.