Main focus of foreign investors will be on capital gains tax: Mark Matthews

Union Budget 2024-25 has proposed a slew of changes for investors in the capital market and real estate. MARK MATTHEWS, head of research for Asia, Julius Baer, told Puneet Wadhwa in an email interview that foreign investors will welcome the focus on fiscal consolidation. The Budget has a fiscal deficit to GDP target of 4.9 per cent this year and 4.5 per cent for next. “If it can be done, I would expect to see credit rating upgrades, which are usually good for financial markets,” Matthews said. Edited excerpts:

Would you say that the Budget lacked the big bang announcements that the market was hoping for?

 

There were indeed no big-bang announcements, but on the other hand I don’t think the market was expecting any. And frankly, I don’t see a lot they could do that is ‘big-bang’, given the major structural reforms from here on would require state participation and implementation (land and labour reform).

My key takeaway is the increase in the capital gains tax increase, which is of course a negative for the market.

Is the Budget populist in your opinion as the government has focused on the demands of its coalition partners as well?

It is populist but not to the point of being socialist. Yes, there has been more given to Bihar and Andhra Pradesh but it doesn’t change the Budget math significantly. I view this as a good thing as it shows the Bharatiya Janata Party (BJP) can operate in a consensus-building environment. Whether more will be directed at other individual states may depend on their response to the projects allocated to Bihar and Andhra Pradesh. If there is a lot of commentary that it is not fair, there might be more allocation to others.

Have retail investors been given a raw deal as the measures saw changes across the capital gains tax structure, buybacks, securities transaction tax (STT)?

The STT is not a bad thing as it can help keep speculative activity in check, which clearly is on the rise. But there is no getting around the fact that capital gains taxes are not good for financial markets.

How are the foreign investors likely to view the Budget proposals, especially in the light of proposed changes to the capital gains tax, STT on F&O, buybacks?

Foreign investors will welcome the focus on fiscal consolidation, with a fiscal deficit to GDP target of 4.9 per cent this year and next year 4.5 per cent. If it can be done, I would expect to see credit rating upgrades, which are usually good for financial markets.

Foreign investors will also note with approval the increased emphasis on upgrading education (especially the ITIs, which are world-famous), and skilling for the youth and women. Both segments of the population are underemployed, and if employed can materially boost the economy.

However, the main focus of foreign investors will be on the capital gains tax. Most other countries in Asia don’t have capital gains tax for non-resident investors. India was a rare exception, and now that capital gains tax is even higher.

Where does India now stand in your investment preference list? Which other Asian / global markets look more attractive than India from a medium-term perspective?

On a five-year view, it is still our favourite. The reasons are good demographics, a rising middle class – a country that is generally in an optimistic frame of mind about its future. But on a one-year view, it is difficult to make a case for the market being inexpensive. It is slightly overvalued.

Are the tax breaks given to the salaried class and focus on rural India enough to give a fillip to consumption? What more could have been done? How should one approach the related stocks in this backdrop?

For the salaries class, it is just Rs 25,000 increase in the standard deduction, 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 ones are likely to see a higher allocation, and which ones are likely to fall off the radar?

No, nothing in the Budget is material enough to merit a change in sector preferences.

How comfortable are you with the valuations of the Indian market at the current levels? Will 2024 be another year of the mid-and small-caps?

India’s stock market valued at a trailing price/earnings (PE) ratio of 25x. This year it should probably have good earnings growth of around 13 per cent. But that is down from 17 per cent growth of last year, and 25x is richly valued compared to the historic average of 20x. So from a valuation perspective, it is too expensive. But with domestic liquidity so strong, I suspect it will continue to grind higher anyway.