New Mauritius tax treaty make it easier for money to flow in: Geoff Lewis, global market strategist

India’s decision to amend its tax treaty with Mauritius removes the long-standing uncertainty, which will make it easier for investors to pour money into Indian equities, said Geoff Lewis, global market strategist with capital markets group of Manulife Asset Management. In an interview with Sanam Mirchandani, Hong Kong-based Lewis said India’s fundamentals remain strong and stocks that will benefit from India’s consumption story and improvement in rural income are good bets. Edited excerpts:

Will the removal of tax benefits on investments coming from Mauritius hit sentiment in the near term?

The removal of the tax benefits has come at a time when the markets have been fairly quiet, calmed by the dovish US Federal Reserve and lessened worries about China.

I don’t think there will be a big negative impact because of the treaty. In fact, it removes the uncertainty that has been hanging over the Indian stock market for many years. Prime Minister Modi and the people who have worked on this policy have done it in a very clever way. It is not retrospective and only applies to future investments.

Will the amended treaty affect flows into Indian markets?

If new investments will be liable to taxation going ahead, it could deter inflows in the short term. In major financial centres such as UK and US, double taxation agreements on investment incomes exist in most cases and they have not been a big barrier to cross border investments. So, I don’t see why it should be a big barrier to investments in India.

The country’s fundamentals haven’t changed. It can pose a slight problem in the short term, but it should not be a problem in the long term. Due to the removal of this uncertainty, it will be easier for most fund managers to invest in Indian equities.

What is your view on Indian markets after this amended tax treaty?

In the rally since February, money has come back into Asian equities, more than offsetting the outflows that we saw from November to January but in the last few weeks, there have been minor outflows, including from India.

Broadly, India looks very attractive among the emerging markets. I do not expect major outflows. We need to see a pick up in Asian exports and further evidence of China’s economy stabilising, which will result in a greater risk appetite for all emerging market equities, and India will capture a share of that money.

India is a more domestically-driven story and it should continue to stack up fairly well. We also like India’s bond market. In between, India may see ups and downs because of growth issues in the world economy.