Asian Emerging Markets In Extended Period Of Outperformance, Says CLSA’s Chris Wood
Asian emerging markets have begun a period of extended outperformance after a multi-year bottom, according to Chris Wood, chief equity strategist at CLSA and author of the weekly newsletter Greed & Fear.
Wood remains optimistic even as he flags off an overvalued Wall Street as the key risk for Asian equities. If a correction in U.S. stocks were to spread to equity markets elsewhere, that could offer investors a great chance to add more Asian equities to their portfolio, he told BloombergQuint in an interview on the sidelines of the CLSA India 2017 Forum.
Watch full interview here.
Here are edited excerpts from the interview.
What is your view on the mother market? Is the corporate tax rate a big determinant for what the U.S. markets will do over the next four months?
I agree with it. In my three-to-four-month view, the U.S. tax debate is a key issue for the U.S. stock market – more important than the Fed policy. I also agree that the key issue is whether it is tax cuts or landmark tax reform. Right now, the odds are still 50-50 on landmark tax reform. It’ll be nice to have a very strong view on the other, but I don’t think it is rational. It is clear that their Congress needs to get some tax package done by the end of the first quarter next year, well in time for the mid-term elections. But the critical issue for markets is whether it is a landmark tax reform they are trying to do, or will it turn out to be something less dramatic, that is, the corporate tax cut.
What is the global market scenario right now? Is it uncertain or do you reckon that this rally that has been going on for numerous years will continue?
In terms of the Asian emerging markets, I remain very constructive. My view is that Asia made a multi-year bottom in terms of relative underperformance. At the beginning of 2016, many global investors thought that China had lost control of its capital account, the China currency was going to collapse, which marked the peak of negative sentiment on China. I think we have begun a period of extended outperformance in the Asian emerging markets. However, the risk if you buy Asian equities today is that Wall Street remains more overvalued than ever, so the risk is that something happens to cause a correction on Wall Street, or you have a correlated selloff globally which is healthy. Technically, it would be a bit of profit-taking and a great chance at add to your Asian equity positions.
But I remain firmly overweight on the Asian emerging markets and my profile is concentrated in China and India. The big story this year is not India but the big story in Asian equity markets is China which has outperformed all other markets and it’s been the pain trade for many global market investors because they began to underweight China.
Would the Wall Street correction bring Asia down or will there be internal factors which will disturb this rally in China, India and other Asian markets?
I think it is less likely. When we talk about near-term issues, the most potent cause for a selloff – apart from the U.S. valuations, concerns about Fed tightening, tax reform not happening, etc – the other news which will precipitate more market concerns relates to the news flow in the Middle-East, which has been very dramatic. That could disrupt the market, if the Middle-East tensions lead to disruptions in the oil supply. But so far, the rally in oil prices have been relatively mild or moderate given the dramatic nature of news flow we are seeing in the Middle East.
What about India in particular?
I am three times structurally overweight in India on my relative return. At the start of the quarter, I did reduce a bit, not that I had overweight because the valuations were high. However, I restored it back to triple overweight when we had the announcement of the bank recapitalization. In my view, that was the missing link in the Indian equity story. There has been a huge number of positive reforms introduced by the immediate administration since the BJP government took power. But there is one missing link. One failure in the middle of many successful reforms introduced and that is the total failure to address the problem of the banking system which was inherited by this government. In my view, it was the reason why the investment cycle has continued to trend down and why the bank loan growth is below normal GDP growth. But we have had the announcement of the bank recapitalization, assuming that it is implemented, it has created some light at the end of the tunnel in terms of a downturn in private sector capex, investment and credit growth. In the two-three-year view, we are going to look with reasonable confidence to our assumption of an investment cycle, not necessarily in the next 12 months, that creates a positive medium-term outlook for India in equities. The other point is, although, the forward PEs are very high, we need to remember the profits as the percentage of nominal GDP in India are at relatively depressed levels since there has been no investment cycle in India. If the investment cycle happens, there is significant potential for the profits to recover. But we are confident of the investment cycle recovery in next 12 months.