 "I remain overweight on Indian markets: Christopher Wood")
As the global financial markets eye the first increase in interest rate by the US Federal Reserve (US Fed) in nearly a decade, Christopher Wood, managing director & equity strategist at CLSA, tells Puneet Wadhwa ahead of the 18th CLSA India Forum from November 16-18 that the biggest risk to financial markets is the attempt to normalise monetary policy in the US that unwinds carry trades globally. Though he maintains an overweight position on India, he believes the biggest disappointment has been the failure of the Modi government to get key laws cleared. From a stock market perspective, the biggest risk in India lies in earnings growth remaining below expectations, he cautions. Edited excerpts:
There are indications by the US Federal Reserve of a possible rate increase in December. Are the global financial markets factoring this in?
They are beginning to. The key thing in this issue is US wage pressures. The reason why the markets now think the Fed will raise rates in December is that the most recent payroll data have shown the biggest increase in average hourly earnings growth since 2009.
Do you think the Fed should have raised rates in the September review, which would have taken away the element of uncertainty from global financial markets? Or was September too soon for a lift-off?
There has been confusion in Fed policy. Many people have criticised the US central bank for not raising rates in September. However, (Fed chair Janet) Yellen has always maintained that the increase will depend on data. My base case is, if the US Fed does raise rates, the market's negative reaction and a slowing economy will force the US central bank to reverse its course in 2016. And then, it will do a new quantitative easing (QE). I am not saying it should do that; I am saying that's what it will do, as it won't like the rate increase reaction in the markets.
With China slashing its key rates and the European Central Bank (ECB) hinting at more liquidity, should the global equity markets fear the Fed's rate increase?
The stock market is unsure whether to celebrate the fact that the US economy looks better, or to worry about rate increases. My guess is that the more we get near to the anticipated rate increase, the more vulnerable the stock market will become.
What are the biggest risks to the global financial markets?
The biggest risk is the attempt to normalise monetary policy in the US that unwinds carry trades globally. People have been borrowing money cheaply to chase yields. So, if that risk manifests itself, it will be seen in rising credit spreads. Therefore, it is the vulnerability in the system that will be exposed and by rising credit spreads. The credit spreads have already been rising since last year, even though the Fed has not raised rates. The area that has risen the most in the US is that of the energy-related issues, because of a collapse in the oil price. So, my message to investors is to watch the credit spreads.
So, what does your India portfolio consist of?
My portfolio in India consists of private banks, housing-finance companies, cars, media, etc.
Banking is one sector that has been in the limelight, given the issue of lenders' non-performing assets/loans (NPA/NPL), especially the public-sector players'. How do you view this?
Well, that is a macroeconomic issue. The important policy area and the biggest reason why the Indian economy is not picking up more quickly is the NPL overhang for state-run banks.
Which sectors are likely to interest you going ahead?
One interesting policy initiative I would like to check on more when I am in India is the attempt to reform the state electricity boards' financing. To me, that is an interesting development. Now the question is whether or not that policy will be successful. That is one area/sector I am looking at.
A large part of the economic benefit that India is deriving comes from relatively soft crude oil prices. What's the way forward here?
I expect the crude oil prices to decline further. To me, it is a matter of time before crude oil breaks the $40/barrel mark and possibly goes even lower. So, that is another reason why I remain structurally overweight on India and the Philippines; they are both beneficiaries of lower oil prices. Low oil prices will benefit Asia in general as well.
Which geographies/economies would you still consider safe from an equity investment perspective?
My recommended overweights are in Asia - the same as 12 months ago. The three main overweights in the Asian context remain India, the Philippines and an out-of-index allocation to Vietnam. On China, I am a little overweight; not a big overweight, though. My overweight stance on India remains unchanged from around the same time last year.
How long are foreign investors and markets willing to be patient with regard to the reform process in India?
I am surprised that the Indian markets did not correct more than they did on the day (and in the week) of the outcome of the Bihar election. But from an objective viewpoint, my key point is that there was an element of surprise, given the scale of the government's loss in the election. The market reaction to the development, that it did not correct more, comes as a surprise. Because the rival candidate who won the election has been a successful manager of the state for the past 10 years, and is perceived to have done a good job, BJP's (Bharatiya Janata Party's) loss is not a big surprise in itself. The scale of the defeat, however, was a surprise.
Do you think the markets and foreign investors are losing faith in the Modi-led government as regards the reform process?
I don't personally think there is a loss of faith. But, I do think there is surprise - rather disappointment - in that the Modi government has not been able to get its laws cleared. The biggest disappointment has been the non-passage of the Bill to implement the goods and services tax (GST). Not because the government does not want to bring reforms but related to the fact that it does not control the Upper House (Rajya Sabha). So, the criticism of the Modi government lies in its failure to manage Parliament. But, as I said, it is not because Modi does not want to bring reforms; it is because his government has not been managing Parliament correctly. That is a big disappointment for foreign investors.
What is your outlook for Indian markets? What are the biggest risks the markets face?
One big risk is that the government still has a small representation in the Upper House of Parliament. So, there is an issue whether it is going to get any laws through. That is a big policy risk. The big bottom-up risk clearly is that earnings growth is not meeting consensus expectations. From a stock market perspective, that is the greatest risk in India. The big compensating positive for India is that interest rates are coming down, and they can come further down. The most important of the reforms that Modi wanted to pass, in my opinion, is GST.
What is your weight for India in the global portfolio? Which sectors make it to your investment list?
If one were to remain in India right now, I think the sectors of choice will be on the domestic demand side - those sectors that are geared to the urban consumer and falling rates.
The automobile sector seems to be springing back to life. The recent April-October four-wheeler sales figures are an indication. Would you look at that sector? And what about banking?
Yes, these are two important areas. I have had Maruti Suzuki in my portfolio for quite some time. Private banks and housing-finance companies are two segments that will benefit from monetary easing in India which I think will continue. The urban consumer is in a better position than the rural consumer. That is because, in my view, the Modi government's achievement so far has been in reducing the subsidies in rural areas; it has resulted in a steep fall in inflation. But the negative consequence of this positive policy has been a weakening in rural demand, which had been artificially stimulated by subsidies.
So what does your India portfolio consist of?
My portfolio in India consists of private banks, housing-finance companies, cars, media, etc.
Banking is one sector that has been in the limelight, given the issue of lenders' non-performing assets/loans (NPA/NPL), especially the public-sector players'. How do you view this?
Well, that is a macroeconomic issue. The important policy area and the biggest reason why the Indian economy is not picking up more quickly is the NPL overhang for state-run banks.
Which sectors are likely to interest you going ahead?
One interesting policy initiative I would like to check on more when I am in India for the 18th CLSA India Forum on November 16-18 is the attempt to reform the state electricity boards' financing. To me, that is an interesting development. Now the question is whether or not that policy will be successful. That is one area/sector I am looking at.
Can you elaborate on your corporate earnings growth estimates?
My point here is that the consensus estimates look very optimistic right now, compared with what is being reported.
Do you have any ballpark estimates of GDP (gross domestic product) growth in India through the next two years?
I am a bit suspicious of GDP growth numbers because the method of calculation has been changed. What I am looking at is whether or not the investment-to-GDP turns up. From the macro data, one key area to look at is investment-to-GDP, and another is whether bank credit growth picks up. If I put the Indian economy on a platter, it will not turn down - but the question is whether it will turn up.
What about gold as an asset class, considering the fall we have seen this year?
I am still keeping gold as insurance. To me, gold is the equivalent of a life insurance policy. We are not in 'normal' times. We are in a situation where the US Fed is hoping to raise rates, but it is not yet certain that it will do so. We have had many years of zero rates in the US.
The situation in the euro zone is that the European Central Bank (ECB) is embarking on a potentially massive QE; Japan also continues to do aggressive QE. So, we have more aggressive monetary policy globally; and there is a bigger debt overhang. So, in my view, gold is an essential insurance, since we are not in 'normal' circumstances. But if the US Fed raises rates, it could fall to $1,000 per ounce level.
A large part of the economic benefit that India is deriving comes from relatively soft crude oil prices. What's the way forward here?
I expect the crude oil prices to decline further. To me, it is a matter of time before crude oil breaks the $40/barrel mark and possibly goes even lower. So, that is another reason why I remain structurally overweight on India and the Philippines; they are both beneficiaries of lower oil prices. Low oil prices will benefit Asia in general as well.
CLSA or CA Taiwan (and/or their respective affiliates) did not participate in a public offering of Maruti Suzuki securities or receive compensation for investment banking services from Maruti Suzuki in the past 12 months.
CLSA, CLSA Americas and/or CA Taiwan does not expect(s) to receive or intend(s) to seek compensation for investment banking services from Maruti Suzuki in the next three months.
CLSA, CLSA Americas and/or CA Taiwan did not receive compensation from Maruti Suzuki for non-investment banking services (eg brokerage services) in the past 12 months.
CLSA, CLSA Americas and/or CA Taiwan (and/or their respective affiliates) does not own(s) 1% or more of Maruti Suzuki.
CLSA, CLSA Americas and/or CA Taiwan and/or the analysts involved in the preparation of this report have no reason to know that an affiliate of CLSA Americas, CLSA and/or CA Taiwan received compensation from Maruti Suzuki for non-investment banking products/services in the past 12 months.
CLSA, CLSA Americas and/or CA Taiwan does not make(s) a market in the securities of Maruti Suzuki
The research analyst(s) or his/their household member(s)/associate(s) or any employee of CLSA Americas, LLC who has the ability to influence research does not has/have a financial interest in the securities or related securities of Maruti Suzuki.
There are indications by the US Federal Reserve of a possible rate increase in December. Are the global financial markets factoring this in?
They are beginning to. The key thing in this issue is US wage pressures. The reason why the markets now think the Fed will raise rates in December is that the most recent payroll data have shown the biggest increase in average hourly earnings growth since 2009.
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My key point here is wages, not jobs. The focus of media and markets is on jobs but in my view, wages is the key. If we get a weak wage number in December, it is possible the Fed will not raise rates. On the other hand, if we get a strong wage number, I think the US Fed will definitely raise rates. Also, what will happen next year will depend on wages. But for now, my base case is for a token rate increase.
Do you think the Fed should have raised rates in the September review, which would have taken away the element of uncertainty from global financial markets? Or was September too soon for a lift-off?
There has been confusion in Fed policy. Many people have criticised the US central bank for not raising rates in September. However, (Fed chair Janet) Yellen has always maintained that the increase will depend on data. My base case is, if the US Fed does raise rates, the market's negative reaction and a slowing economy will force the US central bank to reverse its course in 2016. And then, it will do a new quantitative easing (QE). I am not saying it should do that; I am saying that's what it will do, as it won't like the rate increase reaction in the markets.
With China slashing its key rates and the European Central Bank (ECB) hinting at more liquidity, should the global equity markets fear the Fed's rate increase?
The stock market is unsure whether to celebrate the fact that the US economy looks better, or to worry about rate increases. My guess is that the more we get near to the anticipated rate increase, the more vulnerable the stock market will become.
What are the biggest risks to the global financial markets?
The biggest risk is the attempt to normalise monetary policy in the US that unwinds carry trades globally. People have been borrowing money cheaply to chase yields. So, if that risk manifests itself, it will be seen in rising credit spreads. Therefore, it is the vulnerability in the system that will be exposed and by rising credit spreads. The credit spreads have already been rising since last year, even though the Fed has not raised rates. The area that has risen the most in the US is that of the energy-related issues, because of a collapse in the oil price. So, my message to investors is to watch the credit spreads.
So, what does your India portfolio consist of?
My portfolio in India consists of private banks, housing-finance companies, cars, media, etc.
Banking is one sector that has been in the limelight, given the issue of lenders' non-performing assets/loans (NPA/NPL), especially the public-sector players'. How do you view this?
Well, that is a macroeconomic issue. The important policy area and the biggest reason why the Indian economy is not picking up more quickly is the NPL overhang for state-run banks.
Which sectors are likely to interest you going ahead?
One interesting policy initiative I would like to check on more when I am in India is the attempt to reform the state electricity boards' financing. To me, that is an interesting development. Now the question is whether or not that policy will be successful. That is one area/sector I am looking at.
A large part of the economic benefit that India is deriving comes from relatively soft crude oil prices. What's the way forward here?
I expect the crude oil prices to decline further. To me, it is a matter of time before crude oil breaks the $40/barrel mark and possibly goes even lower. So, that is another reason why I remain structurally overweight on India and the Philippines; they are both beneficiaries of lower oil prices. Low oil prices will benefit Asia in general as well.
Which geographies/economies would you still consider safe from an equity investment perspective?
My recommended overweights are in Asia - the same as 12 months ago. The three main overweights in the Asian context remain India, the Philippines and an out-of-index allocation to Vietnam. On China, I am a little overweight; not a big overweight, though. My overweight stance on India remains unchanged from around the same time last year.
How long are foreign investors and markets willing to be patient with regard to the reform process in India?
I am surprised that the Indian markets did not correct more than they did on the day (and in the week) of the outcome of the Bihar election. But from an objective viewpoint, my key point is that there was an element of surprise, given the scale of the government's loss in the election. The market reaction to the development, that it did not correct more, comes as a surprise. Because the rival candidate who won the election has been a successful manager of the state for the past 10 years, and is perceived to have done a good job, BJP's (Bharatiya Janata Party's) loss is not a big surprise in itself. The scale of the defeat, however, was a surprise.
Do you think the markets and foreign investors are losing faith in the Modi-led government as regards the reform process?
I don't personally think there is a loss of faith. But, I do think there is surprise - rather disappointment - in that the Modi government has not been able to get its laws cleared. The biggest disappointment has been the non-passage of the Bill to implement the goods and services tax (GST). Not because the government does not want to bring reforms but related to the fact that it does not control the Upper House (Rajya Sabha). So, the criticism of the Modi government lies in its failure to manage Parliament. But, as I said, it is not because Modi does not want to bring reforms; it is because his government has not been managing Parliament correctly. That is a big disappointment for foreign investors.
What is your outlook for Indian markets? What are the biggest risks the markets face?
One big risk is that the government still has a small representation in the Upper House of Parliament. So, there is an issue whether it is going to get any laws through. That is a big policy risk. The big bottom-up risk clearly is that earnings growth is not meeting consensus expectations. From a stock market perspective, that is the greatest risk in India. The big compensating positive for India is that interest rates are coming down, and they can come further down. The most important of the reforms that Modi wanted to pass, in my opinion, is GST.
What is your weight for India in the global portfolio? Which sectors make it to your investment list?
If one were to remain in India right now, I think the sectors of choice will be on the domestic demand side - those sectors that are geared to the urban consumer and falling rates.
The automobile sector seems to be springing back to life. The recent April-October four-wheeler sales figures are an indication. Would you look at that sector? And what about banking?
Yes, these are two important areas. I have had Maruti Suzuki in my portfolio for quite some time. Private banks and housing-finance companies are two segments that will benefit from monetary easing in India which I think will continue. The urban consumer is in a better position than the rural consumer. That is because, in my view, the Modi government's achievement so far has been in reducing the subsidies in rural areas; it has resulted in a steep fall in inflation. But the negative consequence of this positive policy has been a weakening in rural demand, which had been artificially stimulated by subsidies.
So what does your India portfolio consist of?
My portfolio in India consists of private banks, housing-finance companies, cars, media, etc.
Banking is one sector that has been in the limelight, given the issue of lenders' non-performing assets/loans (NPA/NPL), especially the public-sector players'. How do you view this?
Well, that is a macroeconomic issue. The important policy area and the biggest reason why the Indian economy is not picking up more quickly is the NPL overhang for state-run banks.
Which sectors are likely to interest you going ahead?
One interesting policy initiative I would like to check on more when I am in India for the 18th CLSA India Forum on November 16-18 is the attempt to reform the state electricity boards' financing. To me, that is an interesting development. Now the question is whether or not that policy will be successful. That is one area/sector I am looking at.
Can you elaborate on your corporate earnings growth estimates?
My point here is that the consensus estimates look very optimistic right now, compared with what is being reported.
Do you have any ballpark estimates of GDP (gross domestic product) growth in India through the next two years?
I am a bit suspicious of GDP growth numbers because the method of calculation has been changed. What I am looking at is whether or not the investment-to-GDP turns up. From the macro data, one key area to look at is investment-to-GDP, and another is whether bank credit growth picks up. If I put the Indian economy on a platter, it will not turn down - but the question is whether it will turn up.
What about gold as an asset class, considering the fall we have seen this year?
I am still keeping gold as insurance. To me, gold is the equivalent of a life insurance policy. We are not in 'normal' times. We are in a situation where the US Fed is hoping to raise rates, but it is not yet certain that it will do so. We have had many years of zero rates in the US.
The situation in the euro zone is that the European Central Bank (ECB) is embarking on a potentially massive QE; Japan also continues to do aggressive QE. So, we have more aggressive monetary policy globally; and there is a bigger debt overhang. So, in my view, gold is an essential insurance, since we are not in 'normal' circumstances. But if the US Fed raises rates, it could fall to $1,000 per ounce level.
A large part of the economic benefit that India is deriving comes from relatively soft crude oil prices. What's the way forward here?
I expect the crude oil prices to decline further. To me, it is a matter of time before crude oil breaks the $40/barrel mark and possibly goes even lower. So, that is another reason why I remain structurally overweight on India and the Philippines; they are both beneficiaries of lower oil prices. Low oil prices will benefit Asia in general as well.
| DISCLAIMER: CLSA, CLSA Americas and/or CA Taiwan (and/or their respective affiliates) did not manage or co-manage a public offering of Maruti Suzuki securities in the past 12 months. |
CLSA or CA Taiwan (and/or their respective affiliates) did not participate in a public offering of Maruti Suzuki securities or receive compensation for investment banking services from Maruti Suzuki in the past 12 months.
CLSA, CLSA Americas and/or CA Taiwan does not expect(s) to receive or intend(s) to seek compensation for investment banking services from Maruti Suzuki in the next three months.
CLSA, CLSA Americas and/or CA Taiwan did not receive compensation from Maruti Suzuki for non-investment banking services (eg brokerage services) in the past 12 months.
CLSA, CLSA Americas and/or CA Taiwan (and/or their respective affiliates) does not own(s) 1% or more of Maruti Suzuki.
CLSA, CLSA Americas and/or CA Taiwan and/or the analysts involved in the preparation of this report have no reason to know that an affiliate of CLSA Americas, CLSA and/or CA Taiwan received compensation from Maruti Suzuki for non-investment banking products/services in the past 12 months.
CLSA, CLSA Americas and/or CA Taiwan does not make(s) a market in the securities of Maruti Suzuki
The research analyst(s) or his/their household member(s)/associate(s) or any employee of CLSA Americas, LLC who has the ability to influence research does not has/have a financial interest in the securities or related securities of Maruti Suzuki.