Christopher Wood, global head of equity strategy at Jefferies, says the recent run-up in equities is more of a bear market rally in the US, which Indian stocks are tailing. In an interview with Sanam Mirchandani, Wood said India is not among his top investment destinations at the moment. Edited excerpts:
What is your evaluation of the rally in Indian markets?
My view is that it is a bear market rally in the US. The reason to be sceptical about the rally in America is that you have a double whammy – tightening of higher rates and shrinking balance sheets – which is negative for liquidity. The rally is driven on hopes that inflation pressures have peaked. Inflation may have peaked but the key issue is whether inflation has settled. The real issue is whether the Fed is going to try and meet its 2% target. India is just following the US. I am suspicious of this rally in the US and India. The market rally in India is closely connected to the rally on Wall Street. Correction in oil has also helped India. I personally remain bullish on oil. I want to continue to own energy stocks. I have not changed my view on India. The key issue here in India is how much rates go up and how far the rupee declines.
Is the Fed likely to continue raising rates aggressively?
The Fed is talking hawkish but at the end of the day, I’m sceptical they are going to stick to the 2% target. My guess is inflation is running about 4% or 5% in America at the end of this year. The inflation issue in America or Europe is much bigger than in India.
Is the worst of foreign investors’ selling in Indian equities over?
They have not bought that much compared to what they sold. One reason that foreigners sold so much in India earlier this year was because they were putting more money into China. China was easing policy and India was tightening, so China looked more attractive. But in recent months, the Chinese economy investment story has been damaged significantly by the continued COVID suppression policy. So that has caused investors to become less constructive on China.
Where are oil prices headed?
By the end of the year, I see oil prices going higher. The main reason why oil prices are not higher is because of the weak demand from China, which is related to the COVID suppression policy. The COVID suppression policy is a negative for China, but it’s a positive for the Indian economy and the Indian market. I remain structurally bullish on oil because of the lack of supply. The other good news for India is the cheaper Russian oil. The COVID suppression policy has caused a significant slowdown in the Chinese economy and weakened Chinese consumer confidence which has led to reduced demand for energy.
Where does India stand in your list of investment destinations?
This year India is not the best market, because of the monetary tightening cycle. The best performing market, when I last checked, in Asia was Indonesia. My biggest overweight in Asia this calendar year so far has been Indonesia. India is fine, but India has got a lot of crosscurrents. On a 10-year view, India is my favourite bet but not in 2022. The RBI is tightening. It was behind the curve, but it is not as bad as it was. I still believe oil is going higher. I’m overweight on India, but not dramatically, only a little overweight. India has done better than I expected at the start of the year because of geopolitical factors, of which the most important is China’s COVID suppression policy. If China did not have the COVID suppression policy, the Chinese stock market would be doing much better and India would be underperforming.
For India, the important thing is what the RBI does. The interesting point about India this year is the resilience of the stock market given the large amount of foreign selling. In the long term, one should remain invested in India but definitely the risk of a correction is rising. What the RBI does is important.
What is your outlook for the rupee?
The Indian currency is going to be vulnerable so long as there is tightening going on. So, the good news is that the RBI was very behind the curve at the start of this year. I have gotten less nervous on the Indian currency in the last few months because the RBI has started raising rates. I was more nervous in January and February before we had the inter meeting hike. India’s inflation issue is a more severe one than in China or Indonesia, for example. So, that’s why India’s currency has been weaker.