Would you completely take all the chatter and murmurs on what the exit polls are likely to predict and what happens if the BJP gets less than 100 seats, more than 120 seats or what have you? Keep that completely aside and would you say that at best this is going to be just a day’s reaction that the market would give even if it does?
Yes, exit polls have also gone wrong in the past. There is no point extrapolating the result of the exit polls into what the final outcome would be but I would broadly say that regardless of which way the results turn out to be. You still have to bet on what you think would be the wealth creation opportunities over the medium term.
You still have to look at each sector on a more fundamental basis and even if you were to connect the outcome of the state elections to what could happen at the centre, I would say that really there is very low correlation of the outcomes of Gujarat elections into policy formation at the centre.
It is a given that this financial year would see some bit of doles or freebies being given by the government to adjust political capital before the big elections in 2019. Not much would change there.
Now budget comes first week of February which means only 45 days are left and I have not heard a single murmur on what we should expect from this year’s budget. Historically, we have seen that budget always has altered the market course by at least 3% to 4%?
I would not stick my neck out and say what could happen but yes this year’s budget is peculiar because there is a tight rope walk which has to be done by the finance minister because we just saw Moody’s upgrading our ratings on the basis of the fact that we are on the path towards fiscal consolidation. But we have already seen in the last couple of months of shortfall in tax related revenues because GST is not really matching up to expectations. We already have some bit of fiscal slippage happening on account of that plus the fact that the government has brought down its share of excise duties towards oil and gas.
At the same time, the government would want to give some amount of doles to the public at large just before the election. So, the two do not square up which means that there is room for fiscal slippage in FY19. That is my only broad take away as of now. Now which sectors would benefit, which would not, is difficult to guesstimate but on a broad brush basis, it looks like fiscal deficit could inch up in FY19 as would inflation to some extent and so could yields. That is my broad thesis for FY19.
As I see the components of your blue chip flexi cap fund, one of your largest holdings is Bajaj Finance and in the year gone by, ever since the PSU bank recap got announced, we have seen how some of these PSBs have more muscle to lend and thereby a challenging point. Have you at any point reduced your holding in any of the NBFC stocks that you own or would you at least keep that on your watch list?
This is a very interesting observation. The short answer to that it is an absolute no. We would still continue to bet only on private sector banks and some select NBFCs at least for this fund and this strategy.
As the same suggests, we are very conscious about the quality of the companies or banks or NBFCs that we are investing in. Now regardless of recapitalisation, what really does not change in terms of the quality of private sector banks versus public sector banks is the fact that qualitatively private sector banks would continue to remain almost 2x in terms of return on assets compared to the public sector basket.
They would have substantially higher ROEs, they would have substantially lower credit costs and I do not think the market share gain theme which has been playing out over the last 20 years is going to change. Possibly the magnitude of market share gain as many of these private sector banks and NBFCs had witnessed in the last three-four years could change. I am not very sure about that, but at least what I am really confident is that they will continue to gain market share and India perhaps is one of the very few countries where 75% of banking sector is still held by public sector banks. Private sector banks and foreign banks put together just have 25% of the market share. So there is huge scope for increase in market share.
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