In an interview with CNBC-TV18, Christopher Wood, Equity Strategist of CLSA, spoke about his reading of the market and his outlook.
Below is a verbatim transcript of the exclusive interview with Christopher Wood on CNBC-TV18. Also watch the accompanying video.
Q: We have seen a bit of correction seeping in over last few days, do you think this will be the first deep correction since the March rally started globally?
A: I would have to say that the chances of that are rising. I am surprised that the US market did not respond more enthusiastically to the ISM data because the ISM is the most key data point driving the S&P up in recent months.
Q: If this is looking like a deeper correction where do you think we are in that process, is most of it behind us or do you think worst of the cut is probably going to happen in the oncoming months?
A: Market will be vulnerable early next year the US, if it becomes clear after this inventory cycle that consumption and employment is not really recovering but when that becomes clear that the market will go down then there will be renewed stimulus in the US. There will be renewed measures trying to generate growth. So the key variable in the West is government policy, America is increasingly demand-driven economy with such growth that is happening is driven by the government be it cash-for-clunkers in car sales, be it first time home tax credit in the housing market, be it the fact that 98% of mortgages being written in America today are underwritten by the Federal Government. So basically stock market and government policy are totally intertwined.
But in case of Asia, I would say the very worst case correction you could get in S&P downturn, is one-third of highs. However, such corrections in my view are big buying opportunities in Asia.
Q: That is precisely the question a lot of people are asking in India as well--whether this small 10% fall is a buying opportunity already or could you get prices which are 15-20% lower even from the correction of the last fortnight which they would like to use as a buying opportunity in case they are just trying to time the market a little bit? Would you expect a cut which is as deep another 15-20% from here?
A: That is possible if the S&P really corrects. Talking India specifically right now, I reduce my overweight in India beginning of this quarter and raise the overweight in China. So I am favouring China over India in terms of stock market performance in this particular quarter. The reason for that is the Shanghai Asia market has already corrected and China was already the worst performer last quarter in Asia Ex-Japan context.
In the case of India, we have had extremely good performance going into this Q4 and my guess is that India is the most likely Asian country to see the first rate hike. We have already had the RBI signal some preemptive tightening measures. So the India stock market going into the rest of this year, going into Q1 of next calendar year will have to deal with a likelihood of monetary tightening--well, that is not a disaster, its preemptive; it just creates some negative noise in the short-term.
Q: What about the other two parameters which is the collateral damage we may face from global markets and earnings disappointment? What do you think will more likely drag India down?
A: The most likely thing to drag India down is the S&P correlation. The most likely thing to make India under perform in Asia short-term is simply monetary tightening measures. However, thus far the better earnings we have seen in the US have been driven more by cost cutting than topline revenue growth. Cost cutting is fine but if US profits next year continue to be driven only primarily by cost cutting not by revenue growth then the market will start to get worried. The key thing to understand is that the US is on the brink of deflation. There is growing risk that US could be in the Japanese style liquidity trap and that sort of fundamental risk is not discounted in current US equity prices.
Q: What is your view on the dollar because a lot of trades in the world are swinging around that? Do you think weakness in the dollar is done for the moment, it is ripe for a rebound or do you think it will not be a meaningful rebound in which case the case for commodities and emerging market equities get stronger?
A: The dollar weakness is primarily driven by the carry trade. I think the dollar has become the new funding currency of choice. So people are increasingly borrowing dollars to buy so called risky assets like commodities, emerging market equities and they are borrowing much less what they used to borrow which were Yen and Swiss Francs. There is a 0.95% correlation this year between the S&P 500 and US dollar index. So that simply means that if equities correct the US dollar rallies and if the equities rally, the US dollar continues to weaken, so the two is almost an automatic reflex.
So you should only buy the dollar or you only assume US dollar strength, if you think equities are going to correct.
Q: We were speaking to one of your colleagues, Krishnan who pointed out that the real estate earnings have been disappointing in India this time, if we are to hit a rate tightening cycle how would you approach a sector like real estate now?
A: Real estate is a sector to be hurt by monetary tightening measures. I don't believe the RBI is going to be aggressive in monetary tightening because global growth outlook remains problematic. I just think they are going to have to start incrementally tightening. So real estate in my view is a long-term interesting story in India but it wouldn't be my favourite sector to buy in Indian stock market today.
Q: We have seen a spike in volatility over the last one week in the US, what is causing this spike in volatility? Is it just a regular process of profit taking or correction which has dragged markets a bit lower or is there some specific trigger or correction which is precipitating the volatility of the last few days?
A: The market is giving some initial evidence of some technically breaking down. Financial stocks which led the countertrend rally in the US since March have begun to weaken. So there is a significant risk that we have begun the biggest correction we have had since March. But in my view the rise in volatility while it has happened is not that dramatic as yet. However, the best signal if we are having a real equity correction will be the behaviour of the US dollar. In my view, the dollar will have a very sharp rebound indeed if the S&P corrects 15-20%.
Q: How have you read the tremendous supply of paper that India has had over the past couple of months? Would that at all be a reason for secondary market under performance or for it getting stifled?
A: That is healthy in my view if the market is going up, people can raise equity. I think that is not a problem.
Asia is in bull market but the S&P is in a bear market, so the next time the S&P corrects, Asia will not correct as badly as it normally does when the S&P corrects. Normally when the S&P corrects, Asian underperforms by as much as it out performed in the rally. Next time we have a proper S&P correction, Asia doesn't do as badly as it normally does simply because Asian economies have demonstrated their resilience this year, which include China, India and Indonesia. Therefore, once you see resilience on the downside in Asian equities you will get renewed investor confidence on the Asian investment story and I think that will allow a whole lot more equity issuance. So equity issuance does reflect near-term digestion problems.
Q: What are you expecting from first half of 2010 calendar? Do you think it will be a difficult period of equity markets given the kind of fundamental economic news you are likely to hear or do you think it will be another leg up for equity markets?
A: I make a distinction between the West and Asia. In the Western world there is going to be growing realization that growth is not going to recover in a healthy fashion but in Asia there is going to be growing realization in 2010 that Asian economic cycles are increasingly decoupling from the West and the Asian domestic demand is resilience.
So I would make a distinction between those two areas. The fundamental point is you only want to be investing in Asian or emerging markets. If you invest in Western markets you invest only in those companies that will have lot of their sales revenues coming from emerging markets.
