FIIs will see the Budget as a continuation of govt policies: Andrew Holland

Interview with chief executive of Avendus Capital Alternate Strategies

Despite challenges at the global and the domestic level, ANDREW HOLLAND, chief executive of Avendus Capital Alternate Strategies, feels India will continue to be seen as a safe haven. In conversation with Puneet Wadhwa, he shares his views on the recent Union Budget and the road ahead for the markets and economy. Edited excerpts:
 
What are your key takeaways from the Budget?
 
While there is nothing groundbreaking, perhaps after the shock of demonetisation, the finance minister delivered exactly what the market needed — stability and consistency. There was nothing negative either, and probably why the markets saw a huge rally after the Budget. In a nutshell, the proposals are a continuation of the policies that the government has followed over the years — ie spend on infrastructure and housing.
 
The abolition of the Foreign Investment Promotion Board (FIPB) is also a welcome step. This signals India is more open to the outside world. Transparency in political funding is another welcome move.
 
How are foreign investors likely to view these proposals?
 
Clarification on offshore taxation proposals is a good move and foreign investors are likely to see this as a positive development. Most foreign institutional investors (FIIs) will see the Budget as a continuation of the existing policies of the government — and that is a positive. However, we were expecting a big cut in taxes for individuals and corporates, and that has not come through. Consequently, I am not sure if animal spirits will be rekindled and people will rush to start spending.

Do you think that the fiscal deficit targets are achievable?

A lot will depend now on the two things. First, the government now has a lot of data post demonetisation in terms of who to target for extra tax. The government is banking on that. The second thing is selling assets – or disinvestment which the government does need to follow through aggressively, else they can fall short of the targets. That said I think even if the target remained at 3.5 per cent, markets would not react too negatively to it.

Where do you think the Budget lacked? What more would you have liked to see in terms of policies for specific sectors?

As always each sector wants something from the budge though the one common thread this time was lower corporate tax. I am wondering if the implementation of the goods and services tax (GST) is playing some role here and that’s the reason the finance minister hasn’t cut taxes much. Indeed, the Economic Survey does mention about a disruption in the economy as a result of GST.

Do you think the Budget has swayed on the populist side rather than boosting consumption, especially after demonetisation?

No, I don’t think so. The focus has been to create more jobs and it is not overly populist in that respect. 

Infrastructure (roads, low cost housing etc) have yet again found prominence in the budget. What is your interpretation of the proposals and the road ahead for this sector? 

The power sector still has its specific problems, which will take time to get resolved. There is a renewed focus on building roads, affordable housing etc. As a result, the cement sector will be a direct beneficiary of the proposals. 

Do you think that the markets and the economy are fully reflecting the impact of demonetisation or is the worst yet to come?

Whilst there are signs that the economy is starting to pick up (auto sales numbers for January look good), I don’t think the budget will accelerate activity, particularly consumer or corporate capex. Therefore there will be a gradual rather than a “V”-shaped recovery.

Do you see FIIs allocating more to Indian markets in 2017?
 
This will depend on how the global economy and policies of major economies shape up. People are still wondering where newly-elected US President Donald Trump’s polices are heading. Information technology (IT) and pharmaceuticals are two big sectors that will remain under pressure in the short term. They both have a reasonable weight in the index. However, this can be offset by the banking sector. Therefore, India will continue to be seen as a safe haven in a more challenging global backdrop.
 
What are your estimates for corporate earrings for FY18 and FY19?
 
Most forecasts in the markets for FY18 earnings growth are around 18 to 20 per cent. My view is that of 10 to 12 per cent. I am slightly cautious towards the implementation of the Goods and Services Tax (GST) in July 2017, which will throw up execution issues. There could be some de-stocking by the companies ahead of the implementation, and we need to wait and watch to see how things work.
 
What are the likely triggers and risks for the markets from here on?
 
Globally, governments are finally talking about fiscal measures to prop-up economies, rather than monetary measures, which include lowering corporate and personal taxes. This means we are moving away from monetary measures to what I believe would be more sustainable economic growth measures. Having said that, we are in the first few weeks of Donald Trump’s presidency and we need to watch for the real risks of trade wars. However, I am not factoring in that in my assumptions. That apart, we have some important elections in 2017, which could see the fears of European Union disintegration rear their head again.
 
Emerging markets (EMs) will probably lag the developed markets (DMs) initially, as the DMs is where you will see the biggest growth coming from. One must look at exporting countries like Korea, China and Taiwan as being the beneficiaries of global growth. India, on the other hand, is more domestic-focused and a defensive play. Going ahead, the domestic flow will drive the markets, rather than the FII flow. As the interest rates come down in India, people will keep looking at equities as an investment worthy asset class.
 
Which sectors are you overweight and underweight on?
 
Private banks are a safe bet. Housing finance companies (not non-banking finance), firms in the infrastructure space like building materials are a good long-term bet. On the negative side, there are IT and pharmaceutical sectors.
 
I have been negative on the IT sector for a considerable time now. The latest policy developments in the US add to the pressure on the costs for the IT companies at a time when they cannot even pass on the burden. The IT industry has become more of a commodity-type business.
 
I am more neutral on the commodity-related plays, which have seen a good run and I don’t want to rush into them now. The dark horse is probably the real estate sector, though it is difficult to play stocks in the affordable housing segment. However, if things stabilise and show improvement, I would look at the listed players in this segment.