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    EM investors should invest in debt and not in equities: Christopher Wood, CLSA

    Synopsis

    'I believe a lot of things will change if Modi stays in the office for next 5 yrs, but the big risk is a lot of things are relying on one person’s ambition,' said Wood.

    ET Bureau
    Speaking to ET’s Biswajit Baruah, Wood said the mandate for emerging market investors is to invest in debt and not so much in equities as they are already overweight

    The Indian market is currently trading at their life-time highs, but the rally seems to be losing steam. What is your outlook for the market?

    Frankly, this consolidation in the market is quite healthy. The key point is do we get the investment cycle resuming. If that happens, then the market will be okay and if it doesn’t, the market will be vulnerable. Currently, I am nearly three times overweight on India compared with the benchmark. Going forward, if there is any significant pullback in the market, I will be looking to increase weightage on India. I have 42 per cent weightage on India in Asia ex-Japan thematic equity portfolio. Lots of foreign investors want to invest in India, but all is in the price after markets have gone up so much.

    What is your target for the Sensex?

    If the investment cycle resumes in India, then it’s a matter of time before Sensex scales to 40000. So, would you say that we are at the start of a multi-year bull run in India? The bull market in India is intact which began some time last year in anticipation that the Modi government will win the elections. I believe a lot of things will change if Modi stays in the office for the next 5 years, but the big risk is a lot of things are relying on one person’s ambition.

    When will the current valuations start worrying you?

    If you (government) don’t get an investment cycle in the next two years, then I would say markets are overvalued. Global emerging market investment managers are bullish on India. That also partly reflects that other emerging markets are not looking as good as India as most of them are linked to commodities, which are under pressure. India is the best positioned in the emerging markets.

    Are you satisfied with the pace at which this government is implementing reforms?

    I think it’s quite reasonable what the new government has done. Maybe, for some people, it’s not been enough, but I am not. It would be wrong to say that nothing has been done. I was not expecting legislations to be passed. For me, the priority was the government needs to be working. The abolishment of the Planning Commission is a significant development symbolically. After the cancellation of the coal blocks by the Supreme Court, the government has quickly ordered the coal auction process; that is a good move. You have seen deregulation of diesel prices; you have seen removal of one of the Cabinet ministers due to underperformance. The prime minister has gone to the US and Japan seeking foreign direct investments. I see progress in a lot of areas. India has elected a prime minister who is more committed to growth than any other prime minister in the world today.

    What are the next big measures that you would expect from the government?

    I would say goods and services tax (GST). Ideally, you should give the new government 2 years to do that as you need involvement of the state governments. Another area where the government is working on is land clearances. For me, these are the two key areas.

    The US Federal Reserve is expected to hike interest rates by the next year. How do you think this will impact global financial markets?

    My personal opinion is that the US will not raise rates next year. I don’t think that the US economy is as strong as the consensus believes. I believe the probability of the US increasing rates in 2015 is less than what the consensus believes and I also believe that there is a possibility that the US Federal Reserve reintroduces a quantitative easing (QE) next year. My belief is that the US Fed may announce a QE than a rate hike. But if the US tries to raise rates, there will be financial stress symptoms in global financial markets and that will get reflected in rising credit spreads. If the US economy starts growing, it will be healthy for emerging markets though there will be some short-term stress as this will lead to a stronger dollar. My view is the rupee will be more resilient because India is not linked to commodities. RBI is managing is policy better and foreigners believe that the Indian economy is likely to grow from here.

     
    Will the Bank of Japan’s stimulus push and likely QE from European Central Bank (ECB) keep the liquidity tap flowing?

    The Bank of Japan’s move to increase QE has surprised everybody. And my base case is the European Central Bank may be doing a QE by the first quarter of 2015. And the US may probably resume some time next year. Now, people believe that with the Indian economy recovering, more money is likely to flow into the debt markets.

    What are your economic growth expectations of India?

    I am confident that the economy is bottoming out here. But the issue is if we are getting a ‘V’ shape recovery and that is I am less sure of. We are not sure as there is not enough evidence that investment cycle is picking up. Corporate earnings have bottomed out.

    Is it time for RBI to start cutting rates?

    I think there is significant potential for monetary easing in 2015. The Reserve Bank of India wants to defeat inflation since it has been troubling for quite some time. We believe that the RBI governor will not cut rates immediately. My view is the longer he holds the rates, the bigger is the potential for interest rates to come down. Meanwhile, I am expecting foreigners to keep buying Indian government bonds. So, it’s a benign cycle and Indian government bond yields are very attractive to foreign investors. I think India is a good story for bond investors, equity investors, and currency investors. RBI is also worried by the environment that the US may increase interest rates next year.

    So, will foreign portfolio money shift from equity to debt?

    The dedicated emerging market investors are already overweight on Indian markets. Currently, I see that the mandate for emerging market investors is to invest on debt and not so much into equities as they are already overweight. The issue is whether global money is coming in, but global investors are waiting for corrections to happen because since Modi has been elected as PM, there has hardly been any correction in the market.

    Which are the sectors you like?

    I am bullish on private banks. I am telling global investors that you cannot buy a lot of India stocks due to liquidity problem. But if one wants to play the macro proxy, then one should invest in private sector banks. The other sectors which I like are infrastructure, auto and cement.

    What's your next big investment theme for Indian markets?

    E-commerce is the next hot theme for Indian markets; there are many companies which have got pre-IPO funding. It’s a big story unfolding in India, but the issue is the e-commerce companies are heads-on with foreign companies and have less infrastructure compared with China. Though the e-commerce story is still some time away, the market hype is already there.
    The Economic Times

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