India's high growth will help soften LTCG blow: Invesco MF's Taher Badshah

With the two major events — general elections and the Budget — now over, the equity market trajectory from here on out will largely depend on the earnings growth momentum, final monsoon reading, interest rates, and upcoming US and state elections, says TAHER BADSHAH, chief investment officer, Invesco Mutual Fund. In conversation with Abhishek Kumar, Badshah says that the hike in capital gains taxation is an adverse development, but given the high growth trajectory of domestic equities, it shouldn’t be a major worry. Edited excerpts:

From an equity standpoint, what stood out for you in the Budget?

Through the Budget, the government has reaffirmed its support for the investment cycle by increasing the allocation towards capital expenditure by 17 per cent. This is in line with market expectations. This time around, they have also tried to boost consumption through new initiatives without taking a populist route.

Another notable aspect was the tax rationalisation and the planned comprehensive review of the tax code. The hike in capital gains taxation is an adverse development for the equity market. However, given that the market can compound somewhere between 15 per cent and 17 per cent at a broader level over the next few years, the roughly 20 per cent increase in long-term capital gains taxation should not be a major worry for investors.

Now that the elections and Budget are out of the way, what factors will dictate the market’s direction from here on out?

While the medium-to-long-term view of India remains positive, there can be some short-term hiccups depending on how earnings manifest.

In the ongoing financial year (2024-25), the expected growth rate is 15 per cent, which, despite being lower than the 20–25 per cent growth seen in the previous two years, is a healthy number.

We will have to watch out for risks to this expectation. Commodity prices, which have been benign for almost two years now, can be one such risk given their cyclical nature.

The market will also wait for the complete picture of the monsoon this year.

Then there is the ongoing corporate results season.

The US election is also a factor, as are the upcoming state elections. Not to forget the interest rate cycle.

Overall, the key would be the earnings growth trajectory, as valuations are elevated.

Which sectors are better placed to deliver right now? Has the Budget changed your view on any of the sectors?

The Budget hasn’t really changed our view on any of the sectors, except for real estate to some extent. We have a fair bit of exposure to real estate companies in our portfolio, and we may now hold back further deployment.

Other than that, the parts of the market that have not done well in recent years include value retail and value consumption, especially the segments that cater to the lower-to-mid-end of the income spectrum.

Areas where we see opportunities emerging are information technology (IT), pharmaceuticals, and commodities, to some extent.

IT has delivered subdued performance in recent years, but now that the discussions around recession in the US and a few other developed markets are over, the next few quarters should be favourable for the sector, at least from a cyclical standpoint. We have been increasing our exposure to IT companies in recent months.

Manufacturing as a theme has done well in recent years, leading to higher valuations. Isn’t your newly launched manufacturing fund late to the party?

Although the manufacturing cycle has been on course for the past two and a half years, it is still in its early stages.

These cycles, as seen in other emerging economies, can last for as long as 10 years if you get the right ingredients and the building blocks are in place.

The valuations are on the higher side. This is to be seen as a growth-oriented opportunity. If we get a good growth path, the valuations will improve with time.

Additionally, the manufacturing theme is quite diversified, with the investable universe ranging from automobile manufacturing and pharmaceuticals to consumer discretionary. This offers greater flexibility to wade through valuation or other challenges.

How do you see the first-quarter results that have come out so far?

Two of the largest sectors have stood out. While IT has been incrementally positive both from a commentary and delivery standpoint, banks have been a mixed bag, with some concerns emerging at a broader level.

The non-performing assets, which were on a declining trend over the past two to three years, inched up in certain cases.

In addition, the Reserve Bank of India has been building safeguards on the lending side and indirectly constraining growth.

In the case of other sectors, like industrials, the outcomes are fairly decent, even though the margin profiles are now settling down.