India less exposed to trade war, oil biggest worry: Chris Wood

The re-election of the coalition led by Prime Minister Narendra Modi is constructive for the Indian stock market, said Christopher Wood, global head of equity strategy at Jefferies, in his first interview after joining the firm. Wood, who has joined Jefferies after spending around two decades at Asian securities firm CLSA, told Sanam Mirchandani that he would buy Indian equities on any pullback and India is one of his top bets within the emerging markets as the country is less exposed to the trade war issues compared to other markets. Wood remains double overweight India in his Asia Pacific ex-Japan relativereturn portfolio. Edited excerpts: What is your reading of the trade war between the US and China?Right now the trade war issue is looking like a potential major negative for markets. It looks unlikely that anything is going to be agreed upon at the G20 summit in June end. Right now the prospects of a trade deal are looking much less than two months ago. That’s a risk to the global economy without a doubt.What will US Federal Reserve do given all the uncertainty around the trade war? Do you think a rate cut is on the cards?Not immediately, no. The Fed will just be watching.The BJP-led coalition has won with a bigger majority than they did in 2014. Do you think Indian markets have more scope to rally even after the gains seen over the past few months?The scale of the majority surprised many people. You can get some consolidation but basically, I view the election results as constructive for the Indian stock market. Obviously, foreigners began re-investing in India from March. My stance on India remains positive and I will be looking to increase weight on India on any pullback. The biggest risk to India right now is an external one, oil prices. I am expecting oil to go higher. If investors own India, they should hedge the oil risk by also owning oil stocks.How does Indian market valuation compare to other EMs?Indian market valuations are high. They are always high. India is definitely not a cheap market. I am overweight on India. My major core portfolio holding in India remains private sector banks.Is it among your top bets within emerging markets?Yes absolutely because India is much less exposed to the trade war issues than many other Asian and emerging markets.With the government facing spending constraints, do you think it will be able to revive the economy from the slowdown?The economy is little slow, but I don't think it is a disaster. One thing causing the slowdown is the liquidity squeeze in the NBFC space. That is an issue which is going to take time to resolve. NBFCs’ lending has slowed dramatically. In the medium term that should be compensated by the private sector banks gaining market share. Will easing fiscal deficit targets to kick-start the economy be a good idea?Fiscally India is running quite a loose policy, but again I don't think it is a disaster. The key point is how the bond and currency markets behave. So far, the currency market and the bond markets are not suggesting great concern on the fiscal situation. The bigger risk is not the fiscal situation. The biggest risk to India's ability to manage the economy could be an external shock – oil going to $100 or higher. That's the biggest risk.The Modi government has allocated ministries and Nirmala Sitharaman has been named finance minister. What is your view on the appointments?To me the key thing about this election is that the Prime Minister has a sufficient majority to continue to run India from the Prime Minister's Office. While ministers are not unimportant, they are not as important as in a different kind of government. The good point is that these announcements have come very quickly.What are your expectations in terms of reforms from the second innings of the Modi government?The most important thing is to consolidate the reforms introduced, one of which is GST. Second is the growing use of direct benefit transfers. The third one is consolidation of the Real Estate Regulation Act. My understanding is that the priority of the new government will be the agriculture sector. There may be a reassessment of the whole minimum support price schemes. Labour reform is also under consideration. That would be very positive, but I am not sure it will happen. Based on my meetings in New Delhi a month ago, I got the impression that agriculture would be the first priority of the re-elected Modi government because rural income has slowed dramatically. But also, I think there is a potential, though it is less certain than agriculture reform, the reforms of labour laws. Obviously that's more tricky, because labour is a state issue under the Indian constitution.Do you have any particular expectations from the Budget in July?The major thing to look out for is the new government's initiative in the agriculture sector. The most important point is to consolidate the reforms that have already been made.The important point is that whatever happens fiscally should not destabilise the currency unduly or the bond market. The biggest risk from the macro standpoint is not domestic, it would be a big increase in oil price. The point about oil is that risk has increased because of the American policy of trying to stop Iranian oil exports.How high is the risk of oil going above $100 a barrel?On a one-two year view it is very high. The Indian government needs to understand that's a major risk.What is your view on the consumption space which has been hit the most by the economic slowdown?Partly, in the short term, it has been exaggerated by the liquidity squeeze in NBFCs. On a one-two year view, that will sort itself out. Right now, that is definitely an issue. I am hoping that the residential property market, which has been in a downturn in India since 2013-2014, will pick up sooner or later. But again, the liquidity squeeze in the NBFCs in the short term is accentuating that downturn because lot of developers can't get financing. On a five-year view, residential property market in India will see a pickup, which will be good for the economy. That will boost the construction sector. The construction sector has the potential to add a significant number of unskilled jobs. The best chance of reviving the economy is the recovery of residential property sector.What is your view on Indian auto stocks?In the short term, they are under pressure but for the long term that's a buying opportunity.Is the worst over for the NBFC stocks?The key issue there is the parentage of the non-bank banks. If the non-bank bank has an established parent, then I believe it is easy for them to get funding. If the nonbank bank doesn’t have parentage then the market no longer trusts credit ratings. So the key issue is the parentage of the non-bank banks. So many of them are now trying to get bank licences so they can access deposits.

from Economic Times http://bit.ly/2Z48Cc0