Chris Wood Has A Message For Foreign Investors Looking To Buy Indian Stocks
Christopher Wood has some advice for foreign investors who missed the chance to invest in India when the markets tumbled before an unprecedented rebound last year—it’s a good time to buy Indian stocks again.
Amid the uncertainty surrounding vaccine efficacy against new Covid-19 variants and practical problems regarding large scale inoculation in emerging markets, Wood, global head of equity at Jefferies, said India is in a better position to do that effectively since it manufactures the vaccines. “Hence, it would be the right time to invest as once India rallies, it rallies quickly.”
Wood increased the India “overweight” level on the Asia Pacific relative-return portfolio (excluding Japan) by 2 percentage points to 14%, back to where it was at the end of last quarter as per his latest Greed & Fear report. He cited factors, including likely peaking of cases in Mumbai, hopes of herd immunity and the upcoming vaccine rollout for optimism that India is getting a handle on the crisis from a six-month investment perspective.
He also cited non-implementation of a national lockdown, which he said would be counterproductive.
The Reserve Bank of India, Wood said in BloombergQuint’s special series Navigating Through Uncertainty, has been taking steps in the right direction. But he would like to see the central bank look at core inflation and not just headline inflation.
He finds Indian government bonds “reasonably attractive on a relative basis” and expects that inclusion in global indices will open up more capital inflows for India. “I have a 20% weighting in the Indian 15-year (government bonds).”
The market veteran sees private banks and insurance as core sectors with a long-term growth potential in India.
Wood said the Indian real estate sector has seen massive consolidation due to the Real Estate Regulation Act and Goods and Services Tax, unlike ever seen in any other economy in his life. Developers that have survived this have a long-term opportunity, he said. Investing in this sector, however, comes at a “little bit high-beta”.
Watch the full interview here-
Edited excerpts from the conversation:
I know Covid-19 is in front and centre of everybody’s mind, but I want to borrow a couple of lines that you’ve used in your April 15 Greed & Fear report. The first thing might be a global issue if at all and that’s inflation. Now you mentioned in the note that during the interim period, investors should continue to keep a close eye on market-driven inflation expectations as you’ve discussed on several occasions. My question is, are you saying that it is not what the US Federal Reserve and the central banks will do but what the market expects them to do which will drive the sentiment and thereby markets in the near term?
What my view, since the start of this calendar year is the most important issue for markets this year is how the Fed will react when it becomes clear that the cyclical rebound out of the pandemic is probably greater than what they’re expecting and also the potentially inflationary pressures, because my view has been that there’s potential for huge triggering of pent-up demand. Since the beginning of the year, we’ve clearly had a slew of growth forecasts going up strongly because of the very strong data being reported. So, to me the strong growth is a positive, the vaccine rollout in the U.S. is positive for cyclical optimism on the American economy but monetary policy remains incredibly easy. So, the risks to markets is quite clear that is any hint of monetary tightening out of the U.S., the Fed wants to remain dovish. So, I’m saying that before we get any monetary tightening or tapering scare, it’s likely to be preceded by rising inflation expectations. So, if inflation expectations are not rising, then markets can relax but inflation expectations have been rising this year, but they’ve not yet risen to the level that could trigger monetary tapering scare. It will trigger a change in Fed policy.
With a presumption that the Fed stays accommodative, but the yields move up gradually over the period, the next three to six months or nine months, will that pose a problem or do you think the market will digest a graduate up move?
To me the market, I basically have a constructive bias towards equities so long as the Fed is not tightening. In my view the question for equities is less, the overall direction is whether U.S. in cyclical growth stocks or growth stocks. So in the last couple of quarters, I’ve had a bias in favour of cyclical stocks simply because of the reopening trade. That obviously has worked but by the end of last quarter the view that cyclical stocks were the place to be had come consensus, so we saw the market go the other way. So far this quarter in terms of growth has performing cyclicals again, but I wouldn’t be surprised if there’s not another run in the cyclical stocks and my view is that the tapering sell off in the stock market triggered by a tapering scare is more likely to happen after treasury bonds have sold off more and cyclical stocks have rallied more but the Fed does not want to tighten, the Fed is trying to stay dovish.
One more follow up and again I’m borrowing a line that you’ve used in your Greed & Fear note and I think you’ve mentioned that you’ve shown a chart as an exhibit which shows there is a potential for a massive allocation from bonds into equities, if inflation does return. So, quite conversely, while the market might fear a return of inflation, you believe that might actually usher in a movement away from bonds into equities, which might actually be positive.
From a relative performance standpoint, if inflation really starts to come back after beating disinflationary trends like in the early 80s. There’s absolutely no doubt that equities will outperform bonds. I mean equities may not do that well in real terms, but they will definitely be much better for preserving capital than bonds but whether inflation is really coming back remains unproven. What I’ve been saying is investors right now should be prepared for an inflation scare and then whether this turns out to be a long term turn in inflation or not will depend on how the central banks—particularly the G7 central banks and in particular, the U.S. Fed, respond. Because if the Fed stays extremely dovish, if the Fed locks in bond yields, for example by implementing some form of yield curve control, that will definitely increase the odds that inflation is turning up. Whereas with the converse, the Fed suddenly turns orthodox, it admits that it’s being too easy and starts meaningfully tapering and contracting the balance sheet. Then there’s a chance that the deflationary trend reasserts itself. That’s why it’s very important how the Fed rates respond but my base case is that the Fed remains dovish and the longer they remain dovish, that creates the potential for a regime shift from a deflationary world to an inflationary world, because we have the most extraordinary level of monetary and fiscal stimulus in America since the pandemic hit and the rate of growth of broad money supply has been enormous.
Chris, in which case, what’s the overarching risk or the overarching trigger for equities over the course of the next six to nine months? If it’s not Fed, presuming that the Fed will stay on course. What’s it they want to do?
The biggest risk to equities without a doubt is not the Fed, it’s sudden evidence that these vaccines have no efficacy. That’s the biggest risk that would trigger a massive bond market rally. Otherwise to me the biggest risk is simply a sudden realisation by the Fed that they’re too easy and the market suddenly having to discount a much more dramatic tapering process than currently. Currently, the market consensus which has been encouraged by the Fed is they will maintain their level of bond purchases throughout this calendar year, start a very gradual tapering process that would be in commencement next year which will go on and on to the end of 2022 that they won’t raise rates until 2023. But to me, a more interesting point is in the course of this event, I think the doves on the Fed will want to do yield curve control and lock in bond yields. If they do that, that would signal that they’re really very serious about bringing inflation back. We already have the yield curve control in Japan and the ECB currently appears to be targeting nominal bond yields too. When governments start to target or hold longer-term government bond yields, that basically is a regime of financial repression. That in my view is much more likely to end with an inflationary outcome because if a government formally targets bond yields or the central bank formally targets bond yields, then they are committing themselves to potentially unlimited balance sheet expansion.
Can I just squeeze in a non-equity question in between? What does this mean for other asset classes, therefore, gold, cryptocurrency, what have you? There are multiple variable factors around this, but I think you’ve written a bit about all of these. Can you speak a bit about that?
Gold has been under a bit of pressure this year which isn’t surprising because we had growing expectations with a cyclical recovery, and we had U.S. treasury bond yields rise by a significant magnitude last quarter, and gold is very sensitive to the level of real interest rates. So, gold in U.S. dollar terms trades around the direction of real rates in the U.S. be it three months or 10 years it wasn’t surprising to see gold come under pressure but my base case at the start of the year that was good it was at risk to correct into 1,750, it got a bit lower than that. Now, bond yields start rising again and the U.S. gold will be vulnerable but if the central bank or the Fed at some point tries to block bond yields, then it will be extremely positive for gold.
But I also think gold now has competition as a store of value trade from crypto and millennials in my view, I don’t think gold and crypto are mutually exclusive. I think bitcoin is a competitor to gold, it’s basically that you can own both, but the practical reality is millennial investors are much more likely to buy bitcoin and gold and the other practical reality is that bitcoin has been massively outperforming gold. So, I think it’s risky to only have all your eggs in the gold basket because bitcoin is tried and tested, it’s been through two massive bear markets. It’s been around long enough for now that I’m assuming it’s not going to go away. Bitcoin actually has a greater and more positive supply dynamic than gold because of this hardening process. We had a hardening of bitcoin last year and after the previous hardenings, you had very big gains in bitcoin. So, my base case is this bitcoin rally will continue, and the other big driver of the bitcoin rally is the institutionalisation, locating and developing institutionalisation of bitcoin because over the last 6 to 12 months, it’s become possible and custodian arrangements have been put in place to allow institutions to invest in bitcoin.
Am I to presume that Christopher Wood believes bitcoin should be a part of portfolios?
I formally introduced an allocation in my global portfolio for a pension fund in bitcoin in the middle of December. The reason I did it then was because it had become possible for institutions to invest in bitcoin whereas I would say, a year and a half ago that was not the case.
The world is probably not looking all that bad. India for fairly idiosyncratic reasons and maybe reasons which can be equated to maybe two- or three-year countries but is looking particularly slightly tough. My question is, Chris up while yes, we are in the midst of a really big Covid nightmare so to say, other economies have gone through such a period. I remember December and in January U.K. went to a terrible time, the NHS was bursting apart at it’s seams and they had a lockdown which India doesn’t have. So, how bad is the situation looking for India, considering that governments have not shown the inclination to lock the economy down so to say?
I personally think that the lockdown last year in India was counterproductive because to me it caused huge collateral damage in the economy which would have caused huge hits for federal human welfare. You have many people operating on daily wages, so I don’t think national lockdowns are practical in the Indian context. Personally, my guess is the governments and the national government formed a similar view because all the evidence is they’re extremely reluctant to impose another national lockdown. Per se, I think that’s absolutely correct and they’re leaving it to the states. Now amid the other horrific news flow because till the middle of March, many people in India were hoping that Covid had peaked.
So, the fact that they have been locked down and I think you can see in the stock market, the Indian stock market hasn’t corrected much relative to the news flow. So, I think that reflects the expectation of investors that there won’t be another national lockdown but the key question in India clearly is the vaccine rollout will accelerate. What we don’t know is whether the vaccines have efficacy against these new variants and we’re not going to know that for some time but to me one of the problems for emerging markets, especially with tropical climates with this vaccine rollout, is that the new technology vaccines like Pfizer and Moderna, which are most easily tweakable for new variants, require sub-zero temperatures. So, assuming you can even afford these vaccines, there’s a practical problem administering these vaccines at scale in countries with tropical climates.
But my larger question is if indeed and what is seeming like the peak of the despair around Covid in India if the economy is not locked down, then would the economic impact of the current wave, be as severe as in the past?
No, it won’t be.
Therefore, what’s the impact on the markets? The reason I ask this is also because I read a note that you wrote some time back wherein for example on cyclicals like banks, you did a double downgrade, right? From an overweight you moved to underweight in banks.
I did that when the lockdown happened. I was very bearish on India when this national lockdown happened because I thought it was technically the wrong policy. I’m talking about last year. So, this year, I’m feeling more constructive precisely because of the national lockdown hasn’t been implemented because I view the national lockdown as completely counterproductive.
Now the interesting point. All I did at the start of this quarter because I’d raised my waiting a lot in India in the last six months, as it became clear the cyclical recovery was happening and also as it became clear that the banks—the percentage of restructured loans in the banks was less than we were fearing. That was a reason to add money to India, many foreign investors did the same, they reduced China and added to India. China recovered first, I did the same thing that made sense as a trade but in the beginning of this quarter when we saw the Covid-19 cases rising, what I did was, I reduced my overweight in India. But I’m doing asset allocation on a six-month view. If I was doing asset allocation on the two-week view, I would have removed all the stocks in India. So, the key question right now is the stock market has not declined very much relative to the nature of news flow. So, to me that reflects investors’ hopes that there won’t be a national lockdown. Foreign investors have turned to sellers in the months to date I believe in India but there was huge buying. There was record buying of Indian equities fourth quarter last year. So, we clearly have risk of more of a correction but for somebody who doesn’t own India at all, this whole setback is an opportunity to buy stocks. They should have bought fourth quarter last year and meanwhile, you’ve had a very a positive pro-growth budget in India. So, the first two years of this government there were concerns among investors including myself that the government was prioritising the social agenda over the growth agenda. I think right now investors are much more comfortable that the growth agenda has been prioritised.
Can I ask you, you mentioned that from a global perspective you believe cyclicals will probably score over growth so to say if I’m loosely putting it. Do you reckon in India, the domestic facing cyclicals are the pocket to bet on currently?
The only thing that needs to be done right now in India is to monitor the daily cases, literally on a daily basis, and that’s what matters most and the second issue is whether the government will stick to its current stance which is, leave it to the states and avoid national lockdowns, but clearly a lot of this has become political in India. A lot of the reporting in the Western media is kind of political in nature. So, there’s a sort of political dialogue going here as well as a dialogue about Covid-19. In my personal opinion, the central government is absolutely correct to avoid a national lockdown. It makes much more sense to leave it up to the people. Indeed the Indian data in the second quarter of last year, I think was worse than any other economy that I am aware of—in terms of the scale of contraction in real GDP growth and nominal GDP growth in India in the second quarter of last year when the lockdown happened. I haven’t reduced my weighting in India more than what I did at the start of the quarter. So, for me, the issue is when do you add back. I’m assuming that there’s no national lockdown. If I’m wrong and there’s a national lockdown, I should have cut the weight even more.
But if there isn’t a national lockdown and if the vaccination drive is seemingly successful, then you would reckon that there is a probability that you would may add back?
My key message to foreign investors is, you may not have bought as much of India as I would have done in the second half of last year because when India rallies, they rally very quickly. So, this is an opportunity to add to what you didn’t buy last year that would be my main message. I think one should assume until proven otherwise that the vaccines have some efficacy against these new variants because there is a practical problem of rolling out vaccines in emerging markets on a scale because of the large population but I personally think that India can do it quite more effectively than many other developing countries. We also need to remember that India has one big advantage than the many other emerging markets, that is, India has the vaccines. India manufactures the vaccines and that’s a big difference than many other countries in Asia.
One quick word on the non-equity side, India’s central bank has been right at the forefront and has probably done a very good job, I wanted to understand your view there, and part two of my question is, there’s this talk of this global bond inclusion, which might come to the rescue of the Indian bond markets, would you believe that?
Well yeah to me because the policy in the G7 world has not been friendly to bond investors. This very aggressive monetary fiscal policy in the G7 world doesn’t really give you huge investor confidence in bonds whereas your policy in India. The policy has been most conservative in China, which is why I’ve been recommending Chinese bonds to global investors. My formal recommendation since the end of March last year has been for investors to sell all their G7 government bonds and buy Asian government bonds. I have 60% weight in the Chinese 10-year in my global sovereign bond portfolio and I have a 20% weight in the Indian 15-year. So to me, the Indian bond market is reasonably attractive on a relative basis, and yes, I think there’s hope that India will start to be included more in the bond indices like China has been and if India is included that will definitely open up more capital inflows.
Do you reckon the Indian central bank has ticked all the right boxes, anything that you would expect the central bank to do more?
I think the central bank has been there and has got it right. Obviously in the Indian central bank, credit growth slowed sharply last year in India. In that environment, it doesn’t make sense to worry too much about inflation because you’ve got a sharp slowdown in credit growth but obviously you’ve got rising food prices in many parts of the world and the lockdowns of last year, aggravated food price inflation in India. So that’s another reason to be wary of lockdowns but ultimately it’s very hard for central banks to manage food prices because then inflation is not a monetary phenomenon. That’s why it may make sense. I believe the Reserve Bank of India’s target is headline inflation but in that sense it may make more sense for the RBI to look at core inflation. I’m not criticising the Indian central bank as I’ve got as about 20% weighting in India, in my global sovereign bond portfolio.
One final question and that’s a bit on the micro. You’ve been a long proponent of real estate in India. You just told me that you’re not negative on banks if anything you are positive on cyclicals. Can you tell us the current stance, presuming that everything goes as per plan?
While the property market was definitely based on what the data I’ve seen from my colleagues in India, Jefferies office, clearly the property sector was really looking at last like it is finally turning after this multi-year bear market. You’ve had massive consolidation in the developer space because of all these policies—be it RERA or GST. So, there has been a massive consolidation and probably I’ve never seen it in any economy in my life actually. So there has to be a long-term opportunity for the developers who have survived the consolidation. Clearly, we’ve now got another setback cyclically with what’s going on but to me the property market is the obvious area to act as a multiplier for the economy and generate employment. I’m telling foreign investors that if I am meaning one or two core sectors in India and I’m not a specialist, the core sectors have to really be things like private banks and insurance. They have long-term growth stories. Property is interesting but it’s obvious these have a little bit high-beta.
What about global cyclicals, the metals and the IT companies?
You’re getting pushback on this view, but I would be surprised, personally if the cyclical rallies over because I still believe just that the pent-up demand can be huge in the U.S. One statistic of American households, the data shows that they have been financial beneficiaries of the pandemic, because they’ve received more money in handouts than they’ve lost in income and a lot of this demand is pent up because they’re really not being allowed out to spend. So, I think this is why the demand can really surprise on the upside as you come out of this pandemic. The big risk to my view is vaccine efficacy.