Euro-zone crisis risks remain; bet on India trade: Woods

John Woods, MD and chief investment strategist, Citi Private Bank explains to CNBC-TV18 that the risk of an unforeseen event worsening the euro-zone crisis has not diminished. Woods advises investors to lock-in on profits from the India trade and remain underweight on China for the time-being.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Global markets have begun to consolidate lately. What is going to be the next big trigger to determine the direction of equity markets worldwide?
A: I think it is going to boil down to perceptions towards the fiscal cliff following the US Presidential elections in November. We have had a large number of key benchmark-events out of the way now- the bond buying program and QE.
I think the market is now going to look forward to the next major event, the Presidential elections and the consequences as it relates to the ability for Congress to avoid the fiscal cliff. Q: The World Bank cautioned that the European crisis has stated to pose a major threat with no sight of a Spanish bailout package. How high is the risk then of the European crisis resurfacing as a big headwind for the rest of the year?
A: I think the risk is ever-present. The likelihood of an unforeseen event actually emanating from Europe is high. Don't forget, there is still a game of brinkmanship between the Spanish government and the EU over the bailout package.
There are daily inconsistencies between Troika and Greek targets. There are concerns over Spanish banks, Cyprus and the broader peripheral islands and Portugal. So the risk of an unseen event is high and has the potential to upset market sentiment. Q: What would you advise clients to do at this point of time?
A: Heading into the uncertainty surrounding the US elections and the fiscal cliff, I think there is a risk of a reversal of liquidity from developed markets in general, not only India, until the ground settles and till the investment environment becomes more clear.
So to that extent, given the very positive run India has had over the last couple of quarters, I would be tempted to lock in profits on the back of that. Q: Within emerging markets, India has had a great run year-to-date. Would you still recommend the 'buy India, sell China' trade for the rest of the year?
A: Well, India has had a fantastic run year-to-date and China has had an appalling run year-to-date. India is up about 22 percent and China is down 5 percent. So clearly, the 'buy India, sell China' trade has worked quite well. Going forward, it is hard to see if the momentum in both economies will continue.
India, for example, has been driven by portfolio inflows on the back of this big surge of liquidity into the country. I am not entirely convinced it is based on fundamentals however. The Chinese deceleration in growth is worrying from a fundamentals perspective, but thus far we have not seen a great deal of interest from foreign investors.
If I was an investor, I would be more than tempted to lock in profits particularly from the India trade and will remain underweight on China for the time-being.