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Global Investors Rethink India Stocks On Historic Tax Stimulus

Modi’s stimulus might just be enough to entice global investors to at least retain their holdings in the nation’s equities.

Traffic and pedestrians pass the Bombay Stock Exchange (BSE) building, center, in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
Traffic and pedestrians pass the Bombay Stock Exchange (BSE) building, center, in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

(Bloomberg) -- India’s Prime Minister Narendra Modi’s $20 billion tax-cut stimulus might just be enough to entice global investors to at least retain, if not increase, their holdings in the nation’s equities.

Just as foreign funds started unwinding the $45 billion investment they made in India’s stock market over the past six years, Modi’s administration on Friday unexpectedly slashed the corporate tax rate on domestic companies to 22% from 30% to boost slowing economic growth and aid company earnings. The S&P BSE Sensex Index has climbed 8.3% in the two sessions since.

Overseas investors bought $461 million worth of shares over the last two days, with purchases on Tuesday the highest in two months. Still, the $5 billion of local stocks they sold this quarter through Sept. 19 would be the biggest quarterly outflow
since 1999, according to data compiled by Bloomberg.

“The tax cut can improve investor sentiment given the selling by foreigners in the past few months and high cash positions in domestic funds,” Prashant Bhayani, chief investment officer for Asia at BNP Paribas Wealth Management, wrote in a note on Monday. “We would accumulate positions in India over time and look to build an allocation,” his note added.

Global Investors Rethink India Stocks On Historic Tax Stimulus

United Overseas Bank Ltd.’s private banking arm’s Chief Investment Officer Teng Hwee Neo has turned “more positive on Indian equities following India’s corporate tax cuts,” he said. “The tax cuts could stimulate more corporate investments into
India,“ he added.

Fund managers in BNP Paribas SA’s asset management arm and Australia-based Northcape Capital Ltd. have also reaffirmed a positive stance toward Indian equities, while brokers including Goldman Sachs Group Inc., Morgan Stanley and UBS Group AG have raised their targets for the key stock gauges after the government slashed the tax rate.

Analysts have wasted no time boosting earnings estimates for India’s key stock index after the surprise announcement on Friday. Estimates for the gauge have jumped more than 9% since then, according to data compiled by Bloomberg.

Global Investors Rethink India Stocks On Historic Tax Stimulus

To be sure, Nick Payne, head of global emerging markets at Merian Global Investors (U.K.) Ltd. said that “the test in the coming months will be to see if corporates share some of the profitability boost into the economy in the form of greater investment or price cuts on products to stimulate demand.”

Payne expects the government to follow up tax cuts with “further stimulative measures,“ especially ones that will improve the ease of doing business and reduce corruption in Asia’s third-biggest economy.

BNP Paribas Wealth’s Bhayani, who is overweight on India stocks, said that the tax break is the first significant policy initiative since Modi’s re-election and the country’s stock valuations have become attractive after a recent sell-off.

Tax cuts will help to “put a floor after the recent sell-off in equity markets,” Bhayani said.

—With assistance by Nupur Acharya and Ronojoy Mazumdar

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