Likewise Adam Applegarth, the chief executive of Northern Rock, the mortgage lender whose share price has sunk faster than the proverbial stone. The reason? Wood, who has a home in Jakarta, is worth listening to. When the history of the global credit crisis is written from a perspective sufficiently detached to shed more light than heat, few people are likely to emerge with their reputation enhanced further than this former Economist journalist. Then again, few people may emerge from the chaos with their reputation enhanced at all. But this is not a housing price bubble, this is a housing finance issue.
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In an interview with ET Now , Christopher Wood , Equity Strategist, CLSA , says the best stories in investment are the most straightforward and the more straightforward story in India in the next five years is affordable housing , based on the policies put in place last year by the current Indian government.
Edited excerpts: What do you make of the current leg of selloff in global markets? Is this just a inflation scare or something else? My base case is the key reason for the correction triggered last month on Wall Street which had a correlated impact globally. It was clearly this one very strong data point of average wage increase of 2.
That in my view sparked that correction and what we saw was the impact of all these machines which dominate trading in the American stock market. That machine dominate trading -- what I call the terminator effect -- had unnaturally suppressed volatility. Last year, I was advising investors towards a low equity exposure to hedge betting on an increasing volatility. Anyway, we had that strong wage data point and that has basically come at a time when markets were already beginning to react to a growing inflation scare in the US.
The reason for that is clearly the passage of US tax reforms which has naturally and probably correctly increased cyclical expectations of what the US GDP growth could be this year that is why you have seen the bonds sell off. Investors were beginning to wonder if the year old bull market in bonds was over.
What could be the impact of this inflation scare or the impact of rising interest rates because like Buffett says, interest rates act like a gravity and they could have an impact on both the pricing of financial assets and business activity? With higher, higher and higher interest rate, my base case for now is we are going to have more of an inflation scare in world markets. Markets think that inflation is coming back but my base case is inflation scare and higher rates will in due course cause the economy to slow.
My base case on the medium-term standpoint is that this whole inflation scare will turn out to be a fake one. But the short-term risk on a three to six months or nine months point of view is we are going to have with inflation scare and more pressure on bond prices and more pressure on high PE stocks globally. In a situation where markets are worrying about monetary tightening and higher interest rates, the most vulnerable stocks are the growth stocks because they have got high PE ratios.
This year, investors should not just own growth stocks, they should also earn more value-orientated stocks because cheaper stocks are less vulnerable to monetary tightening expectations. But my base case is going to be an inflation scare. In fact, inflation scare has already commenced as oppose to a real return of inflation. Do you think the lows for have been made or are they still not in place?
There is definitely a potential between now and the end of the year for more corrections in equities but we are going to trade on data points and the next key data point comes tomorrow which is the average yearly earnings growth.
If average yearly earnings growth slows from 2. If the pace of average yearly earnings growth accelerates from 2. The bottom line is what we also need to remember that we have already commenced monetary tightening in America and every rate hike from here on, increases the risk that the economy will be negatively impacted by these higher rates and we also need to remember that there is a double whammy on monetary tightening going on because the Fed has commenced quantitative tightening i.
I remain overweight on Asia and emerging markets. US President Donald Trump has imposed tariff on imported steel and imported aluminium. What do you think that the Republican administration is trying to achieve? Are they simply doing some posturing with other global leaders or is Donald Trump now committed to breakdown globalisation? Personally, I am taking a more sanguine view that it is more the former than the latter.
Donald Trump for at least years has always signalled that he thought America was being ripped off by his trade partners. In terms of Donald Trump having consistent views over the years, that is the most consistent view. He just wants to demonstrate that he has taken some actions before the mid-term elections but I personally do not believe we are going into full scale trade war. Donald Trump is going against protectionist orthodox Republican policy and that is why the most Republicans are opposed to it but then Donald Trump has never claimed to be an orthodox Republican.
Even though you have been a long-term India bull, after the budget you have cut your weightage on Indian equities by about 2 bps. What has led to this cut? I am still overweight India because I am structurally a big believer in the Indian story but I have been telling fund managers this year that if their careers depend on outperforming the Asian Index in the first six months of , they should not be following my recommended asset allocation strategy. My base case is that India underperforms in the first half of this year partly because we had a very good run last year and my favourites area to own in India -- which I continue to own -- is private sector banks and affordable housing plays.
Given the huge gains in these sectors last year, it would be a very good results if we just trade sideways. In the short term, I am not expecting these stocks to accelerate higher and there is clearly a risk of a pullback.
That is one reason I would not be assuming huge outperformance, but then two other things have happened which have also increased my caution on India in the near term; one, the introduction of a long-term capital gains LTCG tax on equity investments. Personally it is a very unfortunate decision that was made because you have a short term capital gains tax and want to encourage long-term equity investments. The negative implications of this policy are much greater than the positive from a revenue collection standpoint.
The other problem is apparently the insurance industries, equity related funds are not hit by this tax. So, this will encourage investors to take the money in mutual funds and invest in insurance-related investment products which in my view is an unfortunate developments.
The other issue that makes India little bit more vulnerable is the strength of the oil price. I have been thinking that oil will move towards 70 because I had been thinking that Russia would probably cease to cooperate with OPEC production cuts at higher oil prices because that would encourage a significant expansion in Shale. But based on what I have been picking up lately, it may be the case that Russia will stick to the OPEC for longer and Shale may not expand as much as I previously thought.
I have also seen some data which has highlighted to me the dramatic collapse in exploration activity in oil in recent years relative to the ongoing increase in oil demand. Clearly, the oil majors, under pressure cut capacity probably because of oil price collapse but also because of all these electric vehicle alternative energy hype. While we get electric vehicles, the oil prices probably are going to stay up longer than the hypes suggests and there would be an upside for oil. That, I think is a near to medium-term risk.
From a global emerging markets standpoint, the obvious way to hedge that risk is to be very overweight Russia which is a major oil play in emerging markets.
Russia has cheap stocks and this is a year where you want to own more cheap stocks because of the monetary tightening risk and that is the other potential negative for India this year because in the monetary tightening scare, India is vulnerable as it is a high PE growth market. As per your model portfolio, you have a very large recommendation towards buying Indian housing finance companies. I would like to just bunch up two questions into two. Every owns it, it is part of every key larger portfolios.
If there is any redemption pressure, it could have impact on the stocks? I completely agree that is why I said earlier that the private sector banks and housing finance companies are vulnerable to selling pressures. While this monetary tightening risk exists, in the markets plus you have got the added unfortunate risk of mutual fund outflows because of this unwise decision by the Indian government to raise the capital gains tax. So I completely agree. But these are great long-term stories.
I would look to add them on weakness. I can afford to take some short-term hit because the best story in India on a five-year view is the affordable housing sector. Why is that because we all know that Indian telecom sector currently is lacking pricing power and you do not know how the entire Reliance Jio story will pan out? Well that is the not the major part of my portfolio.
But my Indian portfolio is primarily very heavily concentrated around housing finance and private sector banking theme. In fact, I have had the private sector banks in my portfolio ever since October when it was first launched. I am just being strategic here.
I am not being tactical. Tactically, you would have reduced holdings at the start of this year. You also introduced resource companies in your portfolio — China Coal, Vedanta Limited. What is the logic behind that? Are you betting on inflation to come back and are you recommending clients to buy resource companies because they would benefit in an inflationary environment?
The reason why industrial commodities have been stronger, is because of capacity cuts in China. Supply side reform is probably the major policy of the current Chinese government. It has been increasingly evident since late , early and that supply discipline has dramatically improved the macroeconomic story in China.
As a result, anybody involved in areas of excess capacity in China or anybody involved in these sectors globally, is now facing more positive situation. The two areas where China has done most to address excess capacity since are coal and steel.
Historically, you have always raised two concerns that a you are worried about the fact that the private sector capex in India has not started and b the Indian PSB sector is in absolute disarray and after the latest banking fraud. I am sure you are also getting puzzled with the corporate governance standards there. Sooner or later, we will have to have another investment cycle in India. In terms of the bank sector recap that was announced is a positive move but my understanding is the amount being talked about would just fill the hole in the banks.
It is not going to fund a whole new wave of growth. Therefore, I still believe you want to own the private sector banks. Meanwhile, there is the most recent incidence concerning public sector banks, where loss of money and malfeasance has just reminded investors of the problems in the public sector banks. Personally, I hope the latest scandal to hit the public sector banks will revive debate on the need to actually privatise these public sector banks and the favourite outcome would be that there would no longer be any public sector banks in India.
That, I think, would be the best public policy but obviously that may not happen. In one of your recent notes you have mentioned that the domestic liquidity which has been a large over for Indian stock prices going higher, may be restricted in I am hoping it continues but I am concerned that the change in tax treatment may slow down flows abruptly. Hopefully, that does not happen but it is clearly a risk. Gold normally does well when there is inflation scare or when inflation comes back.
Do you think gold could be the winner for , the outlier asset class? No, gold this year is just reflecting dollar weakness and nothing more dramatic than that. It is too early to say that inflation is making a comeback. The jury is out on that. I am personally not convinced that inflation is making a comeback.
I am talking about an inflation scare but I am sceptical about the possibility of it turning into real inflation. How come you have not liked IT and pharma and portfolio focus is entred around Indian cyclicals, banks, to a large extent beneficiaries of the domestic growth rather than beneficiaries of global growth?
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