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3 specific opportunities for distributors from this Budget

Nilesh Shah, MD, Kotak MF

1st February 2017

In a nutshell

  1. Big opportunity for IFAs in semi-urban and rural markets with ponzi schemes on the way out

  2. Demand for advice will soar as bank deposit rates continue to fall further

  3. LTCG changes in property can catalyse shift in allocations from property to equity

  4. Take one message to investors: one good day in the market can get you the same return as a whole year's interest on bank deposits

  5. Fixed income space - consider credit accrual funds over duration funds now

I would rate this Budget as 8/10. It is a pragmatic Budget that balances out diverse priorities including putting money in the hands of taxpayers to boost consumption, increasing allocation towards infra capex and at the same time, maintaining the path towards fiscal prudence.

The FII perspective

Purely from a financial market participant's perspective, I think all of us will do well to remember the day 29th February 2016. In the 3 months prior to that day when the FM presented the last Budget, FIIs were actively selling and our market had corrected some 15%. On that day, in the Budget, the FM reaffirmed India's commitment to fiscal prudence with the fiscal deficit pegged at 3.5% of GDP for FY17 and trending lower to 3% in FY18. That one action differentiated India from several other countries including China, Mexico, Turkey, Brazil, South Africa and so on. FIIs started putting money into Indian markets, we made a bottom around 6800 levels on the Nifty and that bottom has held up comfortably through Brexit, Trump and demonetization.

Today's commitment to continue on the path of fiscal prudence will be the biggest reassurance for FIIs. The other reassurance to FIIs came from the FM's categorical statement in the Parliament today on clarifying the position on the indirect transfer circular of CBDT which was creating a lot of concerns for FIIs. Similarly, proactive extension of 5% withholding tax on ECBs and masala bonds will benefit FIIs.

FM held a mirror for the nation to see - and the picture is indeed shameful

Now lets look at domestic investors. While on the one hand there is more money available to spend for the middle class due to the tax rate cut in the 1st slab, for the first time in my career I have seen a finance minister actually holding a mirror in front of us, that we are a nation of dishonest tax payers. No finance minister has had the courage to share with the nation the uncomfortable facts on tax compliance that were shared today, although many in the financial markets knew this data. I think if 1 crore Indians can give up their LPG subsidy voluntarily, there will be many who will be ashamed today and will resolve to move towards tax compliance. The incremental revenue from better tax compliance will enable the Government to spend as significantly as they have planned on infrastructure, while maintaining fiscal prudence.

Productivity will boost growth

Lets look at productivity - which has been one of our country's weakest points. Earlier, we were spending almost Rs.40,000 crores in MNREGA to essentially dig ditches and fill them up. Now we have spent that money to create 10 lakh clean village ponds and 10,000 composite posts. This will vastly improve agricultural productivity - like we have already seen in Gujarat over the last decade, when similar rain water conservation strategies were effectively implemented.

Take one message to investors on equity markets

Higher consumption, higher spending on infrastructure and focus on productivity enhancement - all of these are growth positive, which is good for earnings and thus for markets. Now clearly, we can't expect many days like today when Sensex went up 500 points. There will be events that will cause the market to become volatile - we have the FOMC meeting due this evening, there will be many more uncertainties from Trump's actions, there is the UP election result, there is the RBI credit policy due early Feb and so on.

But the big message we should take to investors about equity markets is that a one year's return from bank deposits (of around 5% post tax) can be harnessed in a single day or a single week in several stocks in the market - that's the power of equities. I good day's return from the market is equal to an entire year's return from deposits. Now clearly, you need to be in the right stocks or the right funds that invest prudently in good stocks, and such days are indeed rare - but the point is to highlight the power of equity markets to create wealth - especially in the context of optimism on economic and earnings growth.

Fixed income - go for credit accrual funds

On the fixed income side, I believe what FOMC determines today and how RBI responds on 8th Feb will drive our interest rate markets. Our gut is that we should get a 25 bps cut on 8th Feb, which will allow the 10 yr G sec to drift down from the current 6.45% levels to around 6.25% levels. We believe credit accrual funds look promising now in the fixed income space as the carry on higher yielding corporate bonds make them a more attractive opportunity than duration funds.

Specific opportunities for distributors:

1. Big opportunity for IFAs in semi-urban and rural areas

I think there is a big opportunity opening up for IFAs in semi-urban and rural markets. These are markets that have periodically fallen prey to ponzi schemes that collect money by taking advantage of regulatory arbitrage that exists in the system. Commissions paid to agents was ridiculously high and returns committed were also ridiculously high - as a result of which these schemes collected thousands of crores. The FM's statement that a law is being introduced to plug this gap is welcome news indeed. Fund houses need to work with distributors to find ways to reach out to these investors and bring them into mutual funds.

2. Demand for advice will soar

As bank deposit rates continue to move down even from the current low levels, I expect the demand for advice to soar. Many investors who were used to parking their money in relatively high interest bearing deposits all these years, will now have a lot of questions and will need a lot of guidance on reorienting their financial portfolios in the current context to help them beat inflation and taxes in the long term. This can be perhaps the biggest growth driver for advisors and distributors over the next couple of years.

3. LTCG change in property can prompt reallocation towards equity

For affluent investors, the two changes in taxation of property - reduction in LTCG period from 3 years to 2 years and moving forward the indexation base year to 2001 - can catalyse some moves from property market which has anyway been sluggish, towards equity markets, which look promising. There is a significant opportunity here for advisors to engage proactively with HNI clients in these discussions and facilitate such portfolio reallocations.

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