Chris Wood issues stark warning: 25% market correction looms If BJP loses in 2024

Chris Wood of Jefferies

Renowned market strategist Chris Wood, who holds the position of Global Head of Equity Strategy at Jefferies, delivered a notable forecast at the Business Standard BFSI Summit 2023.

Wood expressed concerns that the Indian stock markets could experience a significant correction of 25 percent in the event of the Bharatiya Janata Party (BJP), led by Prime Minister Narendra Modi, failing to secure victory in the 2024 general elections.

Drawing a parallel to the unexpected 2004 election results, Wood remarked, "If there was a repeat of what happened with the surprise election in 2004, then I would expect a 25 percent correction if not more. But the markets would bounce back sharply due to the momentum."

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Wood emphasized the Modi government's introduction of fundamental reforms may prove difficult to reverse. As a precaution, he advised against taking leveraged positions in India in anticipation of the upcoming elections, highlighting the risks associated with a change in leadership.

India: The standout opportunity among emerging markets

Despite these cautionary remarks, Chris Wood pointed to India as the standout domestic equity opportunity within emerging markets (EMs). "India is the best growth story among EMs, and particularly in Asia," he asserted, noting that this belief has gained prominence amid challenges faced by China. However, Wood noted that this perspective is not yet a global consensus, as global investors have been sparingly invested in India. Wood encouraged investors to maintain a structural, long-term presence in the Indian market, advising that every market dip should be considered a potential buying opportunity.

India's Economic potential: A new boom cycle anticipated

Wood anticipates a repeat of the economic boom cycle witnessed from 2002 to 2009, primarily driven by a housing boom followed by private capital expenditure. Notably, the Indian property market has entered its third year of upturn following seven years of stagnation, with no immediate signs of a downturn. He expects the proportion of fixed capital formation as a percentage of Gross Domestic Product (GDP) to rise in the coming years, driving India's economic growth.

China's Economic outlook

Wood likened China to Japan, where growth is currently slowing down. The key question, he posed, is whether this slowdown is a permanent shift or if China will experience a resurgence. Wood expressed his belief that China's growth will return, albeit at a rate of around 3 percent over the next decade, in contrast to India's expected 6-7 percent growth rate.

Challenges for Foreign Institutional Investors

Wood also acknowledged challenges faced by foreign institutional investors seeking to enter the Indian market, with cumbersome processes impeding their investments. He suggested that a significant amount of money previously invested in China has the potential to flow into India. However, he noted that more global funds have flowed into Japan this year due to streamlined investment processes.

Also Read: Dramatic times in Japan’s capital markets: Jefferies’ Chris Wood

Market perspective on the Israel-Hamas conflict

Addressing the Israel-Hamas conflict, Wood noted that markets appeared to assume that the conflict would not escalate into a broader Middle East war, evident in the limited movement in oil prices. However, he cautioned that market assumptions should not be taken as a guarantee.

US Federal Reserve’s focus on economic growth

In the context of the US economy, Wood forecasted an economic downturn in the coming year due to the impact of monetary tightening. He highlighted concerns about rising US Treasury bond yields and their effect on fiscal costs and deficits. The perceived shift in risk regarding US Treasury bonds could have far-reaching consequences. Wood also emphasized the importance of closely monitoring the actions of the US Federal Reserve, particularly in response to weakening labour data coupled with persistent inflation.

Wood suggested that the US Federal Reserve would likely prioritize maintaining a robust workforce to support economic growth. This, he believes, will result in inflation persisting in the 3-4 percent range in the US, exceeding the current mandate of 2 percent, with potential implications for US bonds.

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