Chris Wood hikes exposure to Indian equities despite expensive valuation

The sharp up move from the March 2020 low in the absence of a meaningful recovery in corporate earnings has made Christopher Wood, global head of equity strategy at Jefferies sound caution against the expensive valuation of the Indian equity market. Yet, he has increased exposure to Indian equities in his Asia Pacific ex-Japan relative-return portfolio by one percentage point. Wood had recently hiked allocation to Indian equities in October 2020.

“The Indian stock market is not cheap with the market trading at 21.6x 12-month forward consensus earnings. But the positive point is that the multiple should have a tendency to decline going forward. Jefferies expects over 30 per cent earnings growth for the fiscal year 2022 (FY22) and 13.2 per cent real GDP growth,” Wood wrote in his latest weekly note to investors, GREED & fear.

From their March 2020 lows, it has mostly been a one-way street for the Indian equity markets with large, mid and small-caps firing on all cylinders on the back of foreign investor flows. The S&P BSE Sensex that hit a record high of 45,000 levels in intra-day trade on Friday, has rallied a massive 76 per cent during this period.

Besides equities, Wood has increased India’s weight in GREED & fear’s global sovereign bond portfolio by removing the weighting in the much lower-yielding Singapore 10-year government bond. One reason for doing this, according to him, is the relatively conservative Indian fiscal policy under the current National Democratic Alliance (NDA) government. That apart, he believes that India will, sooner rather than later, be included in global bond indices as a result of recent liberalisation measures.

Starting April 2020, the Indian government issued special bonds with 5, 10 and 30-year maturities, where there are no limits to foreign participation. These securities, Wood feels, essentially provide a dedicated route for foreign institutional investors to invest in, without any capital control on either entry or exit.

“Meanwhile, a risk in 2021 to the Indian macro story, and indeed to the rupee, is the likely rise in the oil price as the world returns to 2019 demand levels of 100 million barrels/day on the other side of the pandemic.

This can be best hedged from the point of view of equity investors by owning oil stocks,” Wood wrote.

The cyclical recovery in India, Wood said, has also taken place in the marked absence of a huge fiscal stimulus in terms of an increase in transfer payments and the like. The Indian government, he believes, seems to have learnt the lesson from China that the way to boost long-term growth and productivity fiscally is by investing public sector funds in infrastructure, not in transfer payments. The result is that, like China, India has eschewed panic stimulus this year.

Bullish on banks

Despite the overhang of a sharp rise in non-performing loans (NPLs) due to the moratorium extended by the banks in the backdrop of Covid-19, Wood remains bullish on Indian private banks from a long-term perspective. In the financial sector, Wood now has exposure to ICICI Bank and HDFC. SBI Life Insurance and ICICI Lombard General Insurance are his bets in the Indian insurance sector.

“GREED & fear had been concerned that the economic collapse triggered by the lockdown in late March to May would trigger a wave of NPLs. Still, the good news is that the government ended the loan moratorium at the end of August. Listed private-sector banks have been able to raise $10 billion of equity so far this year out of a planned $13 billion of capital raising. The second fiscal quarter earnings season has seen Indian banks guiding on the expected outcome of Covid-19-related loan restructurings. The signals are better-than-expected,” Wood wrote.