Capex cycle revival, Modi re-election key for rally: CLSA's Chris Wood

The ‘Indian story’ will be badly damaged if the formidable Narendra Modi government was not re-elected for another term, writes Christopher Wood, managing director, equity strategist at CLSA in his weekly note, GREED & fear.

A key trigger for the markets, according to him, is kick-starting the investment cycle, which Wood feels will be more likely if the non-performing loan (NPL) overhang in the banking system is resolved. The key question here, however, will be whether the deadlines will be enforced since the whole point of the deadline is to force decision-making and faster resolution.

Though India still remains the best long-term story among Asian equities, Wood does not expect the Indian markets to outperform its Asian peers in the first six months of 2018. The road ahead, he says, will depend on the currency movement (US dollar – Indian rupee) in the backdrop of a continuous rally in crude oil prices. 

“India has certainly not been flavour of the month so far in 2018 with a bond market sell-off and concerns about renewed rupee weakness on the back of a rising oil price and a rising current account deficit,” he says.

Recently, Morgan Stanley suggested investors would be better off adding defensive and cyclical counters with a focus on large-cap stocks for best returns ahead of the general elections scheduled for April / May 2019.

In a best-case scenario to which it attaches 30 per cent probability, Morgan Stanley pegs the S&P BSE Sensex at 41,500 levels in the next 12 months. Their base-case (50 per cent probability) and bear-case (20 per cent probability) target for the index stands at 35,700 and 25,000 respectively.

Oppurtunities and threats

Besides the rupee and oil prices, another threat for the Indian markets, Wood says, is a sharp slowdown in mutual fund inflows. This risk grows the more the stock market declines. Still the good news is that so far inflows have slowed but not yet collapsed, let alone turned into outflows.

Though he is not too concerned about the fiscal slippage ahead of the general elections, Wood does caution on the steep valuation of Indian equities, especially in the mid-cap segment.

“The budgeted central government fiscal deficit of 3.3 per cent this fiscal year hardly suggests extreme fiscal laxity. It is also questionable whether Modi will really turn as populist as some fear since this will be contrary to his whole political ethos which is about encouraging development and investment, not handouts,” Wood writes.

In terms of sectors, the best stories to invest in in India remain the affordable housing theme and the dramatic, albeit healthy, consolidation of the residential property market triggered by the “double whammy” of the Real Estate Regulation Act (RERA) and demonetisation, the note says. 

Adding: “Indian property developers with solid balance sheets and a record of completing developments will take market share. The residential property market in India has also finally begun to pick up, after years of oversupply, helped by dramatically improved affordability.”