Chris Wood Ups India’s Weight Unfazed By Taper Scare
Chris Wood said he would raise India’s weight in Jefferies’ Asia Pacific ex-Japan portfolio, notwithstanding a taper scare.
Because of India’s continuing outperformance and China’s underperformance, the Indian ‘Overweight’ in the relative-return portfolio has become a near-neutral, the market veteran said in his Greed & Fear report. To “signal the continuing structural bullish view on India”, he would increase the nation’s “weight this week by two percentage points with the money shaved from China and Hong Kong”.
This comes even as the U.S. Fed minutes released on Aug. 18, according to the Greed & Fear report, showed that most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year”. Whereas the original idea was for the tapering process to take place over a 12-month period in 2022. A sense that tapering is coming sooner than expected, it said, could well cause some jitters in the risk-on trade in equities, and give a reason for treasury bond yields to move higher since the market assumption will be that an earlier-than-expected commencement of tapering will be bearish for treasury bond prices since it means less Fed buying of treasuries.
An easy money stance has clearly been one key drivers of the rally, as in America, which is why India is likely to underperform in any global risk off move triggered by tapering scares, Wood said.
If India corrects more sharply in an aggravated tapering scare, the weighting will be added to. Meanwhile, China would be a natural outperformer in a tapering scare, were it not for the continuing regulatory noise.Chris Wood, Global Head - Equity Strategy, Jefferies
Besides, Wood said his biggest bets in the Asia Ex-Japan portfolio are on Indian domestic names and where the performance is reflected in an outperforming market given the allocation is to specific stocks. “At present 31% of the portfolio is in India.”
The Nifty’s lofty valuations at 21.5 times 12-month forward earnings, too, didn’t deter Wood from being “structurally positive” on the Indian market.
“A new property cycle has commenced, a broader capital spending cycle should be coming sooner or later while the best companies have profited from deleveraging triggered consolidation in sectors such as residential property and housing finance and indeed consumer finance in general,” he said. “Meanwhile, the central government remains firmly pro-growth.”
The extraordinary resilience of the Indian stock market has been driven, as in so many other markets, by the combination of growing retail investor activity and easy liquidity, according to Wood.
“Small retail” ownership of BSE 500 listed stocks, a separate Jefferies report said, had reached a decade-high of 7.0% in June.
According to Wood, there has also been the excitement generated by arrival of high-beta profitless tech theme in the Indian stock market with the listing of Zomato Ltd., India’s version of China’s Meituan, which is now trading at 78% above its IPO level.
But Zomato’s capitalisation, he said, is at $15 billion compared with Meituan’s $159 billion. That, according to him, means Zomato is trading at 36x trailing sales, while Meituan is trading at 7.3 times, way down from the peak rating of 19.5 times sales it enjoyed as recently as February.
The major risk to Greed & Fear is the arrival of a new Covid variant. But that is a risk shared with the rest of the world, Wood said. Otherwise, the other risk, according to him, is a change in the central bank’s dovish policy.
The Reserve Bank of India, Wood said, has been raising its inflation forecast in recent meetings but has yet to signal a change in policy. The central bank raised its CPI inflation forecast for this fiscal to 5.7% in its policy meeting on Aug. 4-6, up from 5.1% projected in June. Still, Wood said, the RBI’s bond purchases under the open market operations programme have continued while there is no talk as yet of rate hikes.