Odds in favour of more near-term correction in Indian stocks: Chris Wood

Chris Wood believes the best way to play Indian markets is the upswing in the Indian property/real estate sector despite the rate hikes by the Reserve Bank of India (RBI)

Foreign investors will be anxious to up India weight on a meaningful correction, said Christopher Wood, global head of equity strategy at Jefferies in his latest note to investors, GREED & fear. He also warned that the odds favour more correction in the near-term in Indian equities, most particularly given the market action on Wall Street.

Growth stocks, he believes, still remain vulnerable to the US Federal Reserve tightening dynamic despite the losses already suffered. That said, the global investor believes Indian stock market remains the best structural growth story in Asia and emerging market (EM) equities for the next 10 to 15 years.

"GREED & fear's India long-only portfolio remains positioned for structural domestic demand-focused themes. But if that is the structural story, there are clearly short-term tactical risks. India has entered a monetary tightening cycle and there remains the real risk of a further spike in the oil price. The currency is also potentially vulnerable. Ultimately, monetary tightening should not prove too painful in this cycle in India with perhaps total tightening of 200 basis point (bp). Another 70bp of rate hikes are now expected in June and August. Such a move is already significantly discounted by the bond market," Wood wrote.

As regards the currency, the rupee tumbled 19 per cent in three months back in 2013 in the backdrop of the "taper tantrum", but the macro story in India lacked then the structural reform agenda of Narendra Modi and the foreign exchange reserve situation, too, was dramatically more precarious, Wood said.

"This is the context in which domestic fund managers have been positively surprised by the relative resilience of the Indian stock market year-to-date, most particularly given the trend of foreign selling. The latter is only a tactical adjustment at a time when India is trading on what has historically been a near peak valuation of 17.5x one-year forward earnings," Wood said.

And how does one benefit from this all?

Wood believes the best way to play Indian markets is the upswing in the Indian property/real estate sector despite the rate hikes by the Reserve Bank of India (RBI), which should be followed with a lag by a broader capex cycle, as was the case in the previous cycle from 2003-2010.

The potential for the repeat of another seven-year cycle in residential property, if not longer, Wood believes, that there can be few major economies where residential property prices have lagged nominal incomes to the extent experienced by India in the past seven years.

"With housing affordability at almost unprecedented levels in terms of mortgage payments relative to income, the combination of affordability, and nominal wage growth running at a likely 8-9 per cent, should fuel housing demand in India at a time when supply is coming down relative to demand," he wrote.

LIC IPO

The long awaited listing of Life Insurance Corporation of India (LIC), Wood believes, was evidence of a renewed commitment to divestment, and indeed privatisation, on the part of the government to initiate major change as part of the so-called New Public Sector Enterprises Policy first announced in February 2021.

"The result is that if Modi is reelected in May 2024 there is the potential for a Thatcherite privatisation wave in India which would be rather refreshing given the extent to which most of the world has been moving against free market policies in the past 15 years or so," he wrote.


=======================

Twitter: @Pun_ditry