Indian markets, economy more balanced now than a year ago: Chris Wood

CHRISTOPHER WOOD, global head of equity strategy at Jefferies has held on to his exposure to Adani group stocks in his India long-only equity portfolio despite a scathing report by Hindenburg Research earlier this year. In a freewheeling conversation with Puneet Wadhwa on the sidelines of the Jefferies Annual India Forum in New Delhi, Wood shared his views on his strategy for the Indian markets in the backdrop of developments back home and globally. Edited excerpts:

You have retained Adani Ports despite the negative news surrounding the group since January 2023-end. Why’s that?

I have held Adani Ports even before the Hindenburg report came out, and the report is no reason to change this holding. I want some infrastructure plays in my portfolio. When it comes to Indian exposure, the biggest exposure in my portfolio has been in private sector banks. That apart, I also have exposure to property stocks. If there is any reason to change my holding in Adani group stocks, the Hindenburg report on the group is not the one. I can add another 20 names in my portfolio from India, but the idea is to have a concentrated portfolio.

But, how come the Hindenburg report did not shake your confidence in Adani group stocks?

My understanding is that there is nothing new in that report for those who invest in the stock market. The group has quality physical assets. It is not like some, or all of them, are theoretical blue-sky stories and not physical assets. That said, I do not have all my investments in one group.

Indian equity markets, you have maintained in your commentary since the past few years, as one of the best structural markets from a 5-year perspective. But the markets/frontline indices haven’t done anything in the last 20 months. Is the sheen wearing off?

Not at all. I have been very encouraged by the performance of the Indian stock markets. India is the best growth story globally, and not just in Asia. When I came to India in April/May 2022, what was noteworthy was the fact that the Indian markets were at historically high valuation to commence a monetary tightening cycle. What’s commendable is the resilience of the Indian markets despite the monetary policy changes. The earnings growth has caught up with the valuations, which are now more in line with historical averages than a year ago. Hence, the markets have been tightening since the past few months in response to the Reserve Bank of India’s (RBI’s) monetary tightening cycle. The RBI has hiked more than expected.

So, do you expect the RBI to pause and pivot soon?

The market is assuming that the RBI is done with the rate hikes, which is also my base case. I feel that the reason for the RBI to raise rates now is just to copy the US Fed. If I was the RBI, I would keep the rates on hold even if the US Fed hikes. One does not need to follow the Fed just for the sake of it. My base case is that the US Fed, too, should keep the monetary policy on hold. But, it is not that simple. The fundamental issue with the US is inflation, which is worrying.

You speak to a lot of foreign investors as well. What’s their key concern as regards Indian markets?

The key concern of foreign investors regarding India in the last 18 months has been the high valuations. The other concern was the reopening of China after a Covid-induced lockdown, which would have seen money flow from Indian equities to China.

Which other equity markets, besides India, according to you, look attractive from a long-term view? Where do you see the big money move, and which sectors will they chase – globally and in India?

Right now, the other story in Asia that is increasingly looking attractive since the last few years is Indonesia. In fact, Indonesia is looking better than the Indian equities, albeit only in the near-term.

For the rest of 2023, do you expect muted returns from the Indian equities?

No, if the markets get a hint that the RBI will cut rates, they’ll get more excited. The risk to global markets is a recession in the US. This will be more of a risk for the information technology (IT) and the banking sectors.

But, isn’t the US debt ceiling the most imminent risk?

My understanding is that the issue has not yet been resolved. The base case is that this issue will get resolved at the last minute. There has been an ideological polarization in US politics. This is just not political theater, there are real ideological issues at stake. So, my base case is that the US debt ceiling issue is likely to be resolved at the last minute.

So, do you see a flutter in the global financial markets if a consensus is not reached even at the 11th hour?

There could be some near-term risk-off trade. One of the compromise would be to delay the whole debate till the US budget, which would allow the market some more time to think.

The next 12 months remain crucial for the Indian political landscape given the state elections and then the general elections. How will you be approaching the Indian equity markets in this backdrop?

Right now, I would not be too worried about it and would not let it influence my decisions regarding my Indian holdings/portfolio. The elections are still one year away. The general elections in India will be a practical issue for the stock market five months ahead of the event. Though the Bharatiya Janata Party (BJP) lost in Karnataka, the consensus view here suggests that the electorate votes differently in state and general elections. That said, Karnataka has never reelected an incumbent government. The base case for foreign investors now is that the government will get reelected next year. If that does not happen, it will trigger selling.

Would you then be trimming your exposure to India?

Well, I would need to see the outcome first. It is too early to worry about all this right now.

What are the key risks for the Indian markets?

By a long way, the biggest risk to the Indian markets from a 12-18-month view is that the current government does not get reelected, or loses in a way that is not represented at all in the next central government. This will be viewed negatively by foreign investors, and there is no doubt about it.

What’s your sector preference in the Indian context, besides your bullishness towards banks?

Our main holding remains banking stocks. Another sector that the investors should look to add now is property. We’re in the third year of an upturn in the residential property prices. The upturn usually lasts 7 years. These stocks can rally in case of monetary easing. The capex-related plays also look good. In the short-term, the discretionary consumption stocks can be under pressure. The information technology (IT) stocks are relatively cheap now due to a fall earlier on US recession fears. In case the US does see a recession, there should be no hurry to buy IT stocks. Then we have idiosyncratic plays, such as the electric vehicle (EV)-focused plays, e-commerce areas where the valuations are no longer expensive.

You are here in India after a year. What are the key changes you see? What are the key takeaways from the Jefferies Annual India Forum?

The key takeaway is that the Indian economy has recovered from the trauma of the Covid pandemic. So, the initial reaction to the pandemic was economically disastrous. A prolonged lockdown would have caused a massive deterioration in asset quality. The pleasant surprise for me is that the consumer finance companies weathered the storm well. The overall impact of the Covid pandemic on the Indian economy was not severe. Though the Indian government distributed food, they avoided the temptation of distributing free money like the West, which caused the inflation problem.

So, what was the bad/not so good part?

For me, the bad part was that the Indian market did not correct more. I could have added more stocks in that case. This time last year, the RBI was a bit behind the curve. They seem to be doing okay now. I think there was pressure from the central government then. There could have been some serious pressure on the currency.

Do you think that there is a mismatch between the Indian markets and the economic fundamentals?

No, I don’t think so. The Indian markets and the economy are well-balanced. The Indian markets and the economy are more balanced now than they were a year ago.

A Jefferies report suggested that India Inc may be on the cusp of a revival in capex cycle. Another report argued that capex plans may get derailed as the country heads deeper into an election year. Can you provide some clarity?

There can be some populist measures, but there is definitely a lack of them right now. One interesting thing about the Indian budget in February was the complete lack of populism. So, the government’s deficit is primarily being driven by infrastructure spending. The gross fixed capital formation has been declining versus the gross domestic product (GDP). Hence, we see the order books of infrastructure-related and industrial companies rising. The corporate sector is also getting deleveraged. All the readings are for a capex cycle.

How are things looking globally? Are the financial markets over with their fears regarding a possible recession?

No, they are not. The equity markets are behaving like there will be a recession in the US. The debt ceiling issue has seen some developments in the bond markets in the US. The money markets are still expecting rate cuts before the year ends. The yield curve has been inverted for a long time now in the US. So, while the money and bond markets are signaling a US recession, the stock markets are expecting the opposite. All signals are confusing. But one has to remember that the rally in the S&P 500 has been driven by a handful of stocks. Ever since Chat GPT came around, it has taken up many consumer applications, there is no doubt that the artificial intelligence’s (AI’s) growth story has been driving the handful of stocks in the US.

Do you expect more skeletons to fall out of the US’ and Europe’s banking closet? And can the contagion spread to the other regions?

No, this is a domestic, US-related issue. Though the contagion can spread, it is more of a US-related problem. More than the US banking issue, it is a US regional banking issue.