Christopher Wood, equity strategist at CLSA, is among the few who have correctly predicted the collapse of sub-prime debt and the global credit crisis, back in 2005. Now he has turned his jaundiced eye to the US dollar, which he thinks is due to lose its standing as the default currency.
Wood feels that everyone should invest in gold and that the metal will outperform oil going forward. The impact of bailout packages in the recovery of the markets, effectiveness of India's proposed infrastructure fund and sectors one can invest in are some of the issues he spoke on, in an interview with Dhiren Shah and Jitendra Kumar Gupta.
How do you think the bailout of Citigroup will play out in the medium term?
The government's approach towards Citigroup is misconceived. If the government is pumping taxpayers money, they should ideally nationalise the bank, as was the case in the Swedish banking rescue program in the early 1990s. Ideally, taxpayers should get 100 per cent ownership of Citigroup. A half-baked approach of putting taxpayer's money in and keeping incumbent management in place gives out unintended negative signals.
Do you see mortgage crisis spreading to credit and retail markets?
Well, that is inevitable. That will happen as the economy slows. But the mortgage market is much bigger than the credit card market. There are going to be further problems in areas such as international real estate, consumer spending and leveraged buyouts. The macro economic diagnosis is clear. The US and many other highly leveraged western economies face, what I call the 'debt deflation bust'. This cycle is very similar to the financial downturn in 1930s.
How long will it be before we come out of this financial downturn?
That depends a lot on the actions of policy makers. If the policy makers allow the institutions to fail, there could be a dramatic economic collapse follow by a V-shaped rebound. But if the Washington US policy makers increasingly resort to more bailouts and aggressive mortgage forbearance policies, then they may reduce the downside trajectory of the housing market but will reduce the chances of a dramatic recovery and this could result in an L-shaped recovery. So in other words, the timing of the cycle will be affected by the policy response.
Your view on India’s plan to set up a special dedicated fund of Rs 50,000 crore to provide loans to infrastructure projects.
I'm not sure how India will raise money to fund these projects. The difference between India and China is that, China has huge fiscal operating freedom. They have got a clean fiscal account. The problem for India is that the economic boom in the last five years was not used by the government as an opportunity to improve significantly its fiscal position.
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The best way to do infrastructure programme in India is by way of built-own-operate-transfer (BOOT) scheme. We have a number of successful examples in India. The interest rates are coming down globally and it will also happen in India.
What kind of monetary policy tilt can be expected from the RBI?
The RBI and the Central Bank of China are the only two central banks in the world that targeted credit growth asset prices and premptively tighten the monetary policy in 2004. Now it has more room to ease the policies.
The key positive for India in the last six months is the steep correction in oil prices. It will give lot of leeway to RBI to reduce rates aggressively. But the RBI would have been in a much better position had the government done more on the fiscal side.
What is your view on gold?
Everybody should own some gold. I have the view that gold will touch $3500 an ounce by end of 2010, since 2001 and I continue to hold this view. The basic premise behind this target is that credit crisis in the western world will undermine the US dollar and the US dollar paper standard is set to collapse. Gold will rally once it assumes the role of a financial asset. It has got nothing to do with demand-supply situation.
What are your earnings estimates for India Inc for the next two quarters and for FY10?
The markets have gone down so much in recent times that I feel that it has factored in the concerns to a large extent. But I'm not sure if the concerns can be fully discounted until the actual results are announced. The two key issues over the next 18-24 months will be the level of non-performing liabilities (NPLs) in the banking system due to the overall slowdown and to what extent the domestic infrastructure cycle continues.
Do you think the economic situation warrants that markets should go even lower?
It all depends on the S&P correlation and how much the S&P goes down. In the short term, India is going to be S&P correlated. The S&P has a big downside if the US dollar remains strong. Another problem that India faces is that there is a lot of foreign money that is still in the market. By mid-2009, we should have a fair bit of clarity on how much India is slowing. If investors start to believe that India will manage to grow at 7 per cent next year, then it's a positive. But right now there is no confidence.
Before the year is out, how high would you rate the probability of some kind of counter trend rally across global markets?
A counter rally is on the cards. But, whether it rallies now or when the new administration comes in, one thing is certain though - the markets will only rally if the banking sector sees a rally, whether in America or India.
Should investors buy stocks right now? Which are the sectors you prefer in India?
Investors should buy equities today only if they don't care about the prices for the next six months. While there could be some bargain hunters right now, a real big flow into India is expected only after the second quarter next calendar year, once the elections are over.
From a five-year view, I would like to accumulate bank and infrastructure stocks and those that reflect domestic demand. I think state-owned banks are cheaper than private banks and less geared in nature. My favourite stock in India right now is the State Bank of India.
I would stay away from the software sector. The problem for the software sector, which should be the beneficiary of the sharp depreciation in rupee, is that financial sector in the West, which many Indian software companies cater to, are in the process of imploding. There is going to be a dramatic downsizing of the western financial services sector.
How do you see India vis-à-vis its Asian peers as an investment option?
India scores over its Asian peers as it is a domestic demand driven economy. India has got a lot of quality corporates too. Hence, I feel it continues to be a very attractive long term equity story (5-10 years view). However, there will be no sustained rally in Asia, unless China rallies. And the rally will be in financials and not commodities, this time around.
