Chris Wood feels sharp slowdown is a great consolidation opportunity for top companies in India.
"In terms of asset allocation, we have double weight on India, but that does not mean we are very bullish on India. Indian stock markets in index terms did remarkably well this year," said Christopher Wood, Global Head of Equity Strategy at global investment banking firm, Jefferies Group.
“Given India’s low weightage, I should be triple overweight on India,” he added.
He said, in Jefferies, the long term portfolio (ex-Asia Japan) - a constant area of exposure - has been Indian private sector banks. The private sector bank index performed well.
The Nifty Private Bank index shot up nearly 15 percent so far in 2019, and, in the same period, the benchmark Nifty50 index gained nearly 11 percent, thanks to easing NPA concerns and structural reforms announced by the government.
"We remain surprising about the collapse of growth in India with nominal rate of GDP falling sharply to 6.1 percent (with Q2 GDP at 4.5 percent, the lowest in more than six years) but earnings growth is nominal. In fact, it was a big surprise to everybody. One aspect to note about India was the remarkable series of structural reforms which is a long term positive but a short term shock," Wood told CNBC-TV18.
Since the second half of August, the government started announcing several measures to bring slowing economy on track including cut in corporate tax rate, auto, real estate, NBFC sectors etc.
He feels the sharp slowdown is a great consolidation opportunity for top companies in India.
"Recently there has been an issue about non-payment of GST money to some states created some reaction which in my view will have a multiplier effect," he said.
In November, five non-BJP-ruled states - West Bengal, Rajasthan, Punjab, Delhi and Kerala - raised concerns over the delay in the payment of GST compensation by the Centre since August, resulting in pressure on their finances as GST comprises significant chunk of revenues for state governments.
Hence, now all eyes are on the meeting of Goods and Services Tax (GST) Council on December 18.
Wood said recent GDP data clearly showed that there had been a big increase in government spending.
The government’s final consumption expenditure increased to 15.64 percent against 10.9 percent YoY and nearly doubled from 8.8 percent in Q1FY20. The private final consumption expenditure (PFCE), a proxy to measure household spending, declined to 5.06 percent YoY in Q2FY20 compared to 9.8 percent (but picked up from 3.1 percent in Q1FY20).
Wood said the government targeted to keep the fiscal deficit at 3.3 percent for FY20, but people in India said, in reality, it was running at 5 percent.
If the fiscal deficit is higher around 5 percent in reality and not 3.3 percent, that will be taken positively by the market, he added.
The investment cycle in India is yet to pick up for the long term. The Insolvency and Bankruptcy Code (IBC) is a structural reform and is long term positive, he added.
Wood feels the best way to deal with stuck real estate projects is to auction projects. But, according to him, there is a problem to collateral value in the real estate sector if there is an auction .
On December 5, the Reserve Bank of India (RBI) decided to pause the rate cut in its December policy meeting after reducing 135 bps repo rate in the last five consecutive meetings.
He feels more monetary easing is coming along with fiscal policy which is extremely bullish for long term government bonds.
"Six seven months ago there was funding pressure on banks and as a result credit growth coming down sharply, hence the bond market was strong. If that trend continues, then stocks with high dividend yield looks attractive," he said.
He said, "We continue to see net inflow into mutual funds. We have seen the impact of slower economy into small midcaps than large-caps."
The key thing to watch out for would be US president Donald Trump and his trade deal with China, he feels.
"In the last two months, US markets have been more optimistic about trade deal to happen. US markets remain expensive, hence shorting market is risky now. Price to sales ratio shows how expensive the US markets is," Wood said.
He further said the Federal Reserve by the monetary policy easing allowed Trump to be aggressive on trade issues with China.
"My base case is the US will not look to raise tariffs on December 16 and Trump will do a deal with China before December 16. Trump has been over estimating his bargaining power in the trade issue with China," he added.
If Trump raises tariffs on Chinese goods, that will hurt the US economy, he feels.
“Capex has been going down in the US, and I don't see capex which already done in 2018,” he said, adding in the US, the big beneficiaries of tax reforms are companies which did share buybacks.
Chris Wood said there could be negative interest rates in the US like Japan and Europe.
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First Published on Dec 6, 2019 03:22 pm