 "Chris Wood")
The Indian stock market is prone to a correction, according to Christopher Wood, global head of equity strategy at Jefferies. The first trigger, he wrote in GREED & fear, his weekly newsletter to investors, is a surprisingly bad outcome for the incumbent Narendra Modi-led Bharatiya Janata Party (BJP) government in the Lok Sabha election.
That said, the reality so far Wood believes, is that Modi has made more positive differences to ordinary people’s lives in the ten years he has been in power than any other leader of a government in the world today. This is why a repeat of the shock BJP defeat in 2004, he said, remains unlikely in the extreme.
“Still it is entirely possible, if not probable, that the ruling party does not do as well as the BJP was hoping following its unexpectedly positive performance in the state elections held in November. Still even if the BJP wins by ‘only’ the number of seats in the 2019 general election that is quite enough to run the government as the past five years have demonstrated,” Wood said.
The second reason that could trigger a stock market correction in India, according to him, are the changes in the capital gains tax structure in the upcoming full Budget later this year. The issue here, Wood said, is whether the tax rates will be raised or whether the period to qualify for long-term gains will be extended, or a combination of both.
“The reason that such proposals are apparently under consideration is growing evidence of retail speculation, most particularly in the options market where India has options for individual stocks. Such paper speculation is unlikely to be viewed as healthy by Modi, or indeed the BJP. GREED & fear’s probably correct assumption is that the Indian Prime Minister has a natural suspicion of those making money out of money, most particularly in a zero-sum game like options,” Wood said.
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Recently, Finance Minister Nirmala Sitharaman had said that the Income-Tax (I-T) department is not planning to tweak the capital gains tax structure if the government is voted back to power in Lok Sabha elections 2024.
Midcaps, banks & IT
Another worrying space in the Indian stock market, Wood said, are the mid-caps that have seen a good run in the past few months and made valuations expensive.
Dedicated emerging market (EM) foreign investors, he said, may no longer be overweight on India in aggregate, given the combination of continuing India outperformance and a market driven by continuing strong domestic flows.
“This is the context where more expensive mid-caps have continued to outperform blue-chips. This is the backdrop against which many foreigners’ portfolios have been underperforming,” Wood wrote.
As a result, the two prominent high-profile sectors - banks and information technology (IT) - that were traditionally owned by foreigners and historically accounting for a large share of the Nifty, Wood said, have underperformed in the recent past.
Private sector banks, Wood believes, also face a near-term issue, which is the regulatory pressure from the Reserve Bank of India (RBI) to slow loan growth in the retail segment, particularly in the area of unsecured loans, and to “manage” loan-to-deposit ratios.
Private sector banks, he said, are already past their best days partly because the best customers have already been acquired, while public sector banks have become more competitive, helped by Narendra Modi’s structural reforms.
“Still that does not mean the private sector banks are without merit as investments. Indeed for value-oriented investors they are approaching a level of valuation which makes them finally appear interesting, with the best example of this de-rating dynamic HDFC Bank following the indigestion pains created by the merger with HDFC,” he said.
