Mark Matthews, Head of Asia Research, Julius Baer
The Union Budget 2024-25 has proposed a slew of changes for investors in the capital market and real estate. MARK MATTHEWS, head of Asia research, Julius Baer, told Puneet Wadhwa in an email interview that foreign investors will welcome the focus on fiscal consolidation. The budget has a deficit-to-GDP target of 4.9 percent this year and 4.5 percent next year. “If it can be done, I expect credit rating upgrades, which are usually good for financial markets,” Matthews said. Edited excerpts:
Do you think the budget did not contain the major announcements that the market was hoping for?
There were indeed no big-bang announcements, but then again I don’t think the market was waiting for them. And honestly I don’t see much they can do that is ‘big-bang’, since the major structural reforms now require state participation and implementation (land and labor reform).
The main conclusion I have drawn is the increase in capital gains tax, which is of course negative for the market.
Do you think the budget is populist because the government is also focusing on the demands of its coalition partners?
It is populist, but not so much socialist. Yes, more has been given to Bihar and Andhra Pradesh, but it does not change the budget calculus significantly. I see this as a good thing because it shows that the Bharatiya Janata Party (BJP) can operate in a consensus-building environment. Whether more will be focused on other individual states may depend on their reaction to the projects allocated to Bihar and Andhra Pradesh. If there is a lot of commentary that it is not fair, more can be allocated to others.
Have retail investors been mistreated as the measures brought about changes in the structure of capital gains tax, share buybacks and securities transaction tax (STT)?
The STT is not bad, because it can help to curb speculative activity, which is clearly increasing. But there is no getting away from the fact that capital gains taxes are not good for financial markets.
How are foreign investors expected to react to the budget proposals, especially in light of the proposed changes in capital gains tax, STT on M&A and share buybacks?
Foreign investors will welcome the focus on fiscal consolidation, with a fiscal deficit-to-GDP target of 4.9 percent this year and 4.5 percent next year. If possible, I expect credit ratings to be upgraded, which is generally good for financial markets.
Foreign investors will also welcome the increased emphasis on improving education (particularly the ITIs, which are world-renowned) and providing skills to youth and women. Both groups are underemployed and, if employed, they could provide a significant boost to the economy.
Foreign investors will, however, focus primarily on capital gains tax. Most other countries in Asia do not have capital gains tax for non-resident investors. India was a rare exception, and now the capital gains tax is even higher.
Where does India now rank on your investment preference list? What other Asian/global markets look more attractive than India from a medium-term perspective?
Five years later, it’s still our favorite. The reasons are good demographics, a growing middle class — a country that’s generally optimistic about the future. But a year later, it’s hard to argue that the market is cheap. It’s slightly overvalued.
Are the tax breaks given to the salaried class and the focus on rural India enough to boost consumption? What more could have been done? How should one approach the related stocks in this context?
For the salary bracket, it is just an increase in the standard deduction of Rs 25,000, which means a tax saving of just Rs 6,000-6,500. That is not enough to boost consumption.
Given the budget proposals, will you change your preference for sectors? Which sectors are likely to get a higher allocation, and which are likely to fall off the radar?
No, there is nothing in the budget that is material enough to warrant a change in sector preferences.
How happy are you with the valuations of the Indian market at current levels? Will 2024 be another year of mid and small caps?
The Indian equity market was valued at a trailing price-earnings (PE) ratio of 25x. This year, it should probably have good earnings growth of around 13 percent. But that is down from last year’s 17 percent growth, and 25x is a high valuation compared to the historical average of 20x. So from a valuation perspective, it is overpriced. But with such strong domestic liquidity, I suspect it will continue to rise anyway.
First print: Jul 25, 2024 | 06:05 AM IST