EMs look better positioned than developed markets: Punita Kumar Sinha, Pacific Paradigm

I am not expecting a very strong earnings session this coming quarter, says Punita Kumar Sinha, Founder, Managing Partner and Chief Investment Officer, Pacific Paradigm Advisors. Excerpts from her interview with ETNOW.

What are your views on higher taxes for the super rich and the surcharge on FPIs. Do you see it impacting flows significantly?
When you look at the developed world, particularly the US and UK, it is not unusual to see these kind of tax rates on high income earners. Of course, when you compare it to south-east Asia, these numbers seem high. As to whether FPIs are going to get more tax and what that will do to flows, I am not sure that the government is doing this deliberately. It is probably an unintended consequence of raising the surcharge. If enough FPIs make representation to the government on this, maybe there will be clarification because I do not think the government wants to reduce foreign flows.

How do you rate the overall budget, particularly from the point of view of kick starting consumption?
The budget is focussed first and foremost on health of the rural economy because the rural economy has been facing a lot of serious challenges over the last several years. That is where the emphasis has been and to improve the quality of life of the broader public. Now it has obviously taken that away in a way. The revenues are coming to some extent from taxing some of the higher income people. which when you compare it to the developed countries like the UK and the US, is not out of line.

But of course, if you compare it to south-east Asia, then it seems high. In terms of spurring growth, the budget has tried to focus on certain sectors of the economy, particularly the banks and the NBFCs which are very important to the health of the overall economy.

Do you see that Fed cutting rates in the near term because that seems to be the consensus and how do you think this is going to impact the flows to emerging markets?
All over the world, there is a tussle going on between central banks and heads of governments. The central banks are still a little hawkish and the governments want them to cut rates and we have seen the recent causality in Turkey. Even though the jobs data has come out good in the US, there will be constant pressure by President Trump on the Fed to cut rates. That pressure would build up in all parts of the world. We are probably going to see easing of monetary conditions but, longer term, the concern is that it may lead to inflation and so that balance still has to be struck.

What is your overall call on the Indian markets in the medium term in light of the slowdown as well as the global setup?
The EMs look better positioned than the developed markets because there is a valuation disparity between EMs and the US and in situations like that, in the past we have seen EMs tend to outperform. EMs are looking better from a valuation perspective and although the growth in the US reported by companies have been higher than EMs so far as the latter has been a little bit on the weaker side. Going forward, the growth mismatch may not be as much.

Having said that, when we talk to companies and managements from India, we used to hear about 15-20% growth numbers in EPS earlier and now they are talking about 10-15% growth. That is quite low in the context of India’s own history. Definitely, the capex cycle needs to pick up and if the banks start to lend, liquidity conditions can ease further. The economy will probably see some strength and that benefit should go into some of the corporate sector as well.

Q1 earnings are all set to begin. Expectations this time are pretty low. Which sectors could do well or perform in line and which ones would be languishing?
The one concern is the supply of equity that might come over the next six to 12 months, considering the Budget announcements on the government cutting their stake in PSU banks and maybe potentially plan to increase public holding from 25 to 35%. Would that mean MNCs and other companies also have to issue paper? That would weigh on the markets and therefore one would have to be stock specific. But if you look at the sectors, financials is probably where you will still see growth and then selected consumers and other companies will continue to see some growth. I am not expecting a very strong earnings session this coming quarter.

Do you think that this is going to be a sharp but a shallow correction or do you think that we are in the start for a deep one?
The correction that we are seeing in the markets is not just specific to India. We are seeing a correction across global markets and the timing of the Budget unfortunately coincided with the start of the correction across global markets. Some of the correction that we are seeing is just a result of what we are seeing everywhere else in the world and some of it is probably specific to India.