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Consumer sentiment to remain subdued; banks may re-rate: Vinay Paharia

Vinay Paharia-Union AMC
Consumer sentiment is unlikely to pick-up in the near-term as the government needs to put money in the hands of consumers so that they can go out and spend, says Vinay Paharia, chief investment officer (CIO) at Union AMC in an interaction with Swati Verma. Edited excerpts: 

Your view on market post corporation tax cut?

The reduction in corporation tax has immediately resulted in an increase in fair value of companies. While previous concerns such as domestic as well as global economic slowdown continue to remain, valuations have become attractive due to the improvement in the underlying fair value. The corporation tax cut could result in the improvement in economy’s investment demand and bring back the animal spirits.

Do you think the measures announced by the FM will bring about a material change in the economy? What else is needed?

All the press conferences by the Finance Minister signalled that the government was watching the economic developments and that economy is important to it and they would take all the necessary steps to improve it. The corporate tax cut is among the biggest in terms of all announcements. From our perspective, it gives immediate money in to the hands of the corporates. Now, it is up to them (the corporates) to decide how to appropriate it to create an impact in the economy.

Having said that, broadly, this entire measure is more for improving the aggregate supply in the economy. Now, there is a need to boost consumer sentiment and improve consumer demand. It can be done in various ways like a cut in personal income tax (I-T) or handing out incentives to consumers, etc. Basically, just like corporation tax cut move has put money in the hands of companies, there should be some kind of savings for consumers too so that they can go out and spend.  

What advice would you like to give investors now? 

Retail investors have been very smart and that clearly shows up in the mutual fund flows. Investors have continued to invest in equity despite their account statements not showing a profit on their recent investments. We recommend them to continue to be disciplined and follow their financial plan and not abandon it due to market volatility. That will ultimately make them realise the benefit of investing in equity as an asset class.  

What is your view on the financial sector?

There could be a substantial improvement in the returns on equity (RoE) due to the reduction in tax cuts. As a result, there can be a significant re-rating of P/E (price-to-earnings) multiples. Based on our internal calculations, the fair value of financials has increased at a faster pace than the general index and valuations in the segment have become attractive. Hence, we are overweight on the sector.

Which banks do you prefer - private or state-run lenders?

It's a mix of both. Public sector banks are predominantly corporate banks and they have seen the biggest impact of higher credit cost and weak economy over the past few years. However, they have seen a meaningful capital infusion and their balance sheets have strengthened over the last two-three years. Currently, we have a very small exposure to public sector banks (PSBs), but meaningful exposure to the private sector banks. We are positive on corporate banks and because of that we are positive on select PSU banks as well.  

Your stance on the auto sector? 

The trend in the auto sector has been very subdued. What remains to be now seen is whether the sentiment changes at the consumer level as well. Thus, the upcoming festive season will be a key monitorable. We think there could be a very minor improvement in the consumer demand. Unless and until there is some sort of a concrete measure to improve consumer demand, we may see only a marginal improvement in it, at least in the near term.

What are your estimates for corporate earnings in the coming quarters? 

We feel the index level earnings can be misleading. So, we don't look at the index-level earnings, but instead we compute the fair value of the index. Basis our internal research, the corporation tax cut has resulted in a high-single digit increase in the fair value of the Nifty index.

Your sector preference?

We are overweight on the financial sector post the corporation tax cut as the valuations have substantially improved, which the market is yet to factor in. Apart from that, we have already been overweight on IT and utility sectors. We are underweight on Consumer discretionary, Consumer staple and Materials (commodities) sectors.  

What about the mid-and-small-caps?

We are very well-balanced in the large, mid and small-cap segments of the market and all the three segments are reasonably valued. On relative basis, it is not that one is better than the other.  

At the start of the previous financial year (FY19), we had almost negligible investments in mid and small-caps in our diversified equity funds. It is only over the last six months or so that we have gradually increased our weightage to small and mid-caps in such funds.

How long do you see the monetary policy in India to remain accommodative?

In our opinion, the current dovish monetary policy could continue for some more time. Difficult to predict how long but the trend is definitely towards softening. The only hurdle is that of a potentially higher fiscal deficit, which could result in a reduction in the headroom for the expected softening of interest rates.

Your view on the global developments? 

Easing of monetary policy by global central banks is one of the biggest positives for demand for risk assets like India. While the slowing economic growth in the developed countries is negative for India’s economy because it impacts demand in exports sector, contribution of exports is much lower compared to domestic consumption and investment. Thus, India’s fortunes could be more governed by its domestic economy and monetary policy rather than the global ones. The corporation tax cut can lead to some of the global companies shifting base to India, to diversify their manufacturing base away from China, due to ongoing US-China trade war.

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