Corporate Tax Cut Not Enough For Market Re-Rating, Says Bank Julius Baer’s Mark Matthews

Boosting the bottom line of India Inc. through a corporate tax rate cut, though beneficial, isn’t enough for a market re-rating, according to Bank Julius Baer & Co.’s Mark Matthews.

The economy as a whole will need to bounce back for that to happen, the head of research in Asia told BloombergQuint in an interview.

In September, India unexpectedly cut corporate tax rates for domestic companies to revive the economy that is growing at its slowest pace in six years. According to Matthews, its effect will be broadly positive.

“Right now it’s all over the place because different companies are taking advantage of the tax rate cut to do different things but I think it will add a few percentages on to earnings per share growth in the coming quarters,” he said, adding he would not worry about its effect on the fiscal deficit.

While the tax cut alone may not be enough to propel the economy, it will help to boost private investment, he said. Private investment, according to Matthews, is a “piece of the puzzle” holding India back. It stems from the issues of credit squeeze, high non-performing assets in the private and public banking system, and the non-banking financial company crisis which took center space in late 2018.

Essar Steel Judgment

For Matthews, the Supreme Court’s judgment on the Essar Steel Ltd. insolvency case. is a positive event.

The Supreme Court on Friday allowed ArcelorMittal to pay creditors for Essar Steel, one of the biggest assets facing bankruptcy with a debt of more than Rs 54,000 crore, paving the way for the billionaire Lakshmi Mittal-led company to take over the insolvent steelmaker for Rs 42,000 crore. The apex court also said the distribution of claims will take place according to a resolution plan by the winning bidder, setting aside a previous decision by the National Company Law Appellate Tribunal that sought proportionate distribution among different classes of creditors.

Transition Ahead

About India’s allure as an emerging market and the lack of funds from foreign investors, Matthews said the emerging markets cluster as a whole has been largely ignored by them since the last eight years because of a strong U.S. dollar.

That, however, is set to change as soon as within a year, he said.

“What excites me over the next decade, I do think the leadership will move away from the U.S. market, as hard as it is for us to believe that today. There will be a transition over the next one year and emerging market will be a beneficiary. And at that point, I think you’ll see a much larger chunk of inflows come to India,” he said.

But the U.S. dollar will have to weaken before that happens, Matthews said.

Comparing India’s equity market to China and the U.S., he said it is much closer to the Nasdaq in terms of valuation. “It’s at about 20 times earnings, Nasdaq is around 25 and China is around 10. It isn’t a cheap market.” That being said, he sees multiple pockets of cheapness in India.

Trade Talk Optimism

The U.S. and Chinese trade negotiators held “constructive discussions” in a phone call on Saturday to address each side’s core concerns of phase one of the trade deal. “The trade talks finally look like they’re going to go somewhere,” Matthews said.

Still, this is just the first phase, also the simplest, of at least three phases which will cover complicated issues such as the trade imbalance and intellectual property protocol. “I would say is that I don’t expect the markets to make a major move back simply because the deal is being spread out in phases, probably three,” he said.

Watch | Bank Julius Baer’s Mark Matthews on the Indian economy, trade talks and fund flows