Chris Wood rejigs India exposure; says lockdown disastrous for economy

Wood has rejigged his exposure to Indian stocks in his Asia ex-Japan long-only portfolio with HDFC Bank and ICICI Bank paving the way for Cipla. Besides, he remains bullish Reliance Industries.

Christopher Wood, global head of equity strategy at Jefferies believes lockdown in countries like India and Indonesia more are disastrous for human welfare and economies since there is no help for small businesses being handed out, nor are there any unemployment benefits.

In the US, Wood argues, the Small Business Administration’s Paycheck Protection Programme will provide up to $349 billion in forgivable loans to small businesses to pay their employees for eight weeks during the health crisis.

“The loan amounts will be forgiven as long as they are used to cover payroll costs, mortgage interest, rent and utility costs while employee and compensation levels are maintained. As of April16, $342 billion of such loans have been granted to 1.66 million small businesses, with a vast majority (74 per cent) of the loans going to businesses borrowing less than $150,000,” he wrote in his weekly note to investors, GREED & fear.

As regards India, Wood remains concerned that the lockdown in the economy continues, which in turn, will impact the consumer lending cycle. “GREED & fear repeats the point that in countries such as India, with young demographics, such a lockdown causes more human suffering that Covid-19 itself. This continuing lockdown is, unfortunately, making it ever more inevitable that India will suffer a consumer lending cycle. There is also a growing risk of increased forbearance on local lenders, as there is for lenders everywhere,” he said.

Portfolio rejig

As an investment strategy, Wood has rejigged his exposure to Indian stocks in his Asia ex-Japan long-only portfolio with HDFC Bank and ICICI Bank paving the way for Kotak Bank and Cipla.

“HDFC Bank and ICICI Bank will be removed from the portfolio while an initial three percentage point weighting will be introduced in Kotak Bank. This reduces the exposure of the portfolio in Indian private sector banks from eight percentage points to three. India has not really had a negative consumer credit cycle during this period. That is now probably about to change. For reasons of sentiment more than logic, GREED & fear will maintain one bank. But this will be the bank which has the best history of growing through past negative credit cycles and, in an interesting move, approved raising equity capital (subject to approvals) presumably to prepare for troubled times ahead," Wood wrote.

Exposure to HDFC Life Insurance has also been done away with, which has reduced the exposure of his Asia ex-Japan long-only portfolio to Indian non-bank financials from 18 percentage points (ppt) to 14 ppt.

“One new investment will be introduced in India. This is a 4 per cent weighting in pharmaceutical company Cipla, a manufacturer of GREED & fear’s favoured hydroxychloroquine among other drugs,” Wood said.

Hikes exposure to RIL

Wood also remains bullish on Reliance Industries Limited (RIL), especially after the deal with Facebook and has added an additional one percentage point exposure to the Mukesh Ambani-controlled firm.

“The main reason to be happy is that GREED & fear’s Asia ex-Japan long-only portfolio has a 5 per cent investment in RIL and that position is held primarily as an ecommerce play not as an oil refining play. RIL is now 12.7 per cent of the MSCI India Index and 13.9 per cent of the Sensex, which means that passive funds have to keep buying it, and active managers will be under renewed growing pressure not to be underweight the stock as many of them are,” Wood wrote.

He, however, still believes that India remains a great long-term domestic demand story, which is why Facebook founder Mark Zuckerberg wants to be more involved. Zuckerberg, he says, is undoubtedly right to link up with a connected party rather than trying to compete head on with the locals as Amazon has been trying.

Chris Woods Portfolio