 "Investors aren't going to like a coalition govt: Christopher Wood")
Brokerage firm CLSA's chief equity strategist, Christopher Wood, is not so worried about the country's fiscal or current account deficit as about the investment cycle picking up. In a brief telephone conversation with Clifford Alvares, he says the Lok Sabha elections will determine whether this cycle will turn around. Edited excerpts:
How do you view the Indian economy?
The Reserve Bank of India governor has stabilised the currency and the inflation data has moderated. But the focus is the (Lok Sabha) elections. There is no evidence of the investment cycle turning around. Investors will be watching the elections closely, as it might provide the catalyst for investment to pick up.
Investors looking forward to a Bharatiya Janata Party (BJP)-led government are hoping the party can secure more than 220 seats, needed to run an effective government. Both domestic and foreign investors would want a BJP-led government. Investors are not going to like a third-front or coalition government. Investors are more concerned about the investment cycle turning around.
The US central bank reducing its bond-buying stimulus (QE tapering) has hurt a lot of emerging markets, including India. Should it be a cause for worry?
QE tapering is not a key issue for India because there's not a lot of foreign ownership of government bonds in India, unlike in Turkey or Indonesia. To me, the key macroeconomic issue is whether investment in India will pick up. If the investment resumes, foreign investors will surely come to India.
How concerned are you about the rising proportion of bad loans?
You cannot have a new investment cycle unless you address the problems of the old one. One wants to see the regulator and policymakers addressing the issue of non-performing assets (bad loans). If the situation is not addressed, it reduces the chances of a new investment cycle starting. I see more action coming in this area.
Are you overweight on India?
I was overweight on India during the CLSA Forum. At that time, there were expectations BJP would have a more viable government. I am definitely overweight now but not massively overweight on India.
Do you see the government reining in its fiscal deficit?
All these issues like the fiscal deficit, current account deficit and volatile currency are secondary to the investment cycle. If the investment cycle resumes, growth will pick up and the current account deficit and fiscal deficit will become manageable. But if, say, the investment cycle does not resume in the next two-three years, the fiscal deficit will increase and be more serious and the rupee will depreciate further.
The reason why India did so well as a stock market between 2002 and 2010 is because it had an accelerated investment cycle. The real issue is whether the government can jump-start the investment cycle; the other is about the problems of the banking system that could impede the resumption of the next investment cycle. If these can be resolved, all other issues can be taken care of.
Why have investors moved away from some information technology (IT) and pharmaceutical stocks to cyclical stocks?
The Indian market in recent years has been driven by pharma, software and domestic consumer firms. Obviously, growth has slowed dramatically in India and it is not going to accelerate unless we have a new investment cycle. But IT and pharma have got nothing to do with the domestic Indian story.
If you believe BJP can get a majority, the odds favour they will be trying to create a policy framework that will encourage a new investment cycle. So, some capital expenditure and industrial stocks have risen. But if the elections results show a weak coalition government, all these stocks will decline again.
How do you view the Indian economy?
The Reserve Bank of India governor has stabilised the currency and the inflation data has moderated. But the focus is the (Lok Sabha) elections. There is no evidence of the investment cycle turning around. Investors will be watching the elections closely, as it might provide the catalyst for investment to pick up.
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The US central bank reducing its bond-buying stimulus (QE tapering) has hurt a lot of emerging markets, including India. Should it be a cause for worry?
QE tapering is not a key issue for India because there's not a lot of foreign ownership of government bonds in India, unlike in Turkey or Indonesia. To me, the key macroeconomic issue is whether investment in India will pick up. If the investment resumes, foreign investors will surely come to India.
How concerned are you about the rising proportion of bad loans?
You cannot have a new investment cycle unless you address the problems of the old one. One wants to see the regulator and policymakers addressing the issue of non-performing assets (bad loans). If the situation is not addressed, it reduces the chances of a new investment cycle starting. I see more action coming in this area.
Are you overweight on India?
I was overweight on India during the CLSA Forum. At that time, there were expectations BJP would have a more viable government. I am definitely overweight now but not massively overweight on India.
Do you see the government reining in its fiscal deficit?
All these issues like the fiscal deficit, current account deficit and volatile currency are secondary to the investment cycle. If the investment cycle resumes, growth will pick up and the current account deficit and fiscal deficit will become manageable. But if, say, the investment cycle does not resume in the next two-three years, the fiscal deficit will increase and be more serious and the rupee will depreciate further.
The reason why India did so well as a stock market between 2002 and 2010 is because it had an accelerated investment cycle. The real issue is whether the government can jump-start the investment cycle; the other is about the problems of the banking system that could impede the resumption of the next investment cycle. If these can be resolved, all other issues can be taken care of.
Why have investors moved away from some information technology (IT) and pharmaceutical stocks to cyclical stocks?
The Indian market in recent years has been driven by pharma, software and domestic consumer firms. Obviously, growth has slowed dramatically in India and it is not going to accelerate unless we have a new investment cycle. But IT and pharma have got nothing to do with the domestic Indian story.
If you believe BJP can get a majority, the odds favour they will be trying to create a policy framework that will encourage a new investment cycle. So, some capital expenditure and industrial stocks have risen. But if the elections results show a weak coalition government, all these stocks will decline again.