Global markets can retest March lows if infections surge: Christopher Wood

The measures were too extreme even when compared to other countries, and for a developing nation like India were a risky bet from an economic standpoint, says Christopher Wood

Global markets were volatile last week amid the possibility of a second wave of coronavirus infections and a weaker-than-expected projection of the US economy. Christopher Wood, global head (equity strategy) at Jefferies, tells Puneet Wadhwa that the most positive thing for Indian stocks right now is that the lockdown is ending in most places. Edited excerpts:

Has the rally in global markets since their March'20 lows surprised you?
 

The dramatic rally since April has been driven by liquidity pumped in by the US Federal Reserve (US Fed). The important thing to note here is the US Fed signalled that it plans to buy investment-grade bonds and, thus, enable credit spreads to come down. That apart, the virus spread in Western Europe and the US has not been as bad as feared in the beginning of March, when most people were expecting hospitals being overrun by Covid-19 cases. While the markets were rallying, there is still one big risk — the possibility of infections going up again — and that would end the rally.

Can the Indian markets retest their March lows?
 

In India, the government has reversed the lockdown. It seems to me that the Narendra Modi government has done almost a complete U-turn. In a developing country like India, a very aggressive lockdown can create more panic as daily wage earners/labourers lose their jobs and find it hard to survive. All this would have created more human suffering than what is caused by the virus itself. The way this lockdown was introduced created a panic. All this combined -- the reopening of the economy and global developments — have seen a rally in cyclical stocks. I don’t think the markets can re-test their March lows, unless there is a huge spike in infections. If there is no huge spike in the US and Europe, I believe the consensus economists’ will also start talking about a sharp V-shaped recovery in the third quarter of 2020 (Q3CY20) in the US. So far, the data on the virus looks more positive in Europe than in the US.

Do you see global central banks continuing with their ‘easy money’ policy?
 

In my view, central banks' easing is completely over the top and the policy response has been way too extreme. Once it became clear that hospital systems would not be overrun, the lockdown should have been eased. There is no reason to cause so much economic damage. It has become very clear in the last three months that this virus is a danger to elder demographics and the key focus should be to protect them. There is absolutely no reason why people under the age of 50 have been locked down. I call this policy ‘lockdown lunacy.’ In response to the virus, the world went mad with massive fiscal deficits, which the younger generation will unfortunately have to inherit. This is most extreme in the western world and not in Asia.

Your estimates of contraction in global GDP due to Covid-19? And India?
 

I don’t think the forecasts made by any economist are relevant. It is the government policy that matters in terms of ending lockdowns. The other thing that matters between now and June-end is the rate of infections. Europe and the US are now reopening — and more they reopen, it will be important to assess whether the virus will come back or has the threat receded. We will find out in the next few weeks. The markets can retest March lows if Covid-19 infections spike. If it doesn’t, the markets will continue to rally, especially cyclical stocks, in the hope of a V-shaped recovery.

You have exit all Indian banks in your Asia ex-Japan long-only portfolio recently. Your view on the sector?
 

Banks will move up when cyclical stocks rally. That said, I am concerned about the consumer-lending cycle in India. This lockdown has increased the risk of a consumer-lending non-performing loan (NPL) cycle. There was already a growing risk and then we had this lockdown. For the first time, I don’t have any Indian bank stock in my Asia ex-Japan long-only portfolio that I have maintained since 2002. That said, I still have life insurance plays and housing finance companies; I also added a vehicle producer in India.

Sectors you like in the Indian context?
 

I have been bullish on energy and auto-related stocks, which I prefer to back. Energy had a perfect storm when the oil price dipped into negative territory, but bounced back sharply. If the economic sentiment improves and we have a V-shaped recovery, people will start buying oil and cars. Maruti Suzuki, in the Indian context, had no sales in April. So in the Indian context, two-wheeler companies and carmakers are my favourites.

What have you been advising investors globally?

Over the past few weeks, I have been advising to buy energy and auto-related stocks. The biggest risk of buying equities is the risk of a spike in infections in the US. Given the rally, we have seen since March, it is advisable that investors put in 50 per cent now and the remainder at the end of June, after assessing how much has the infection spread.

What’s your view on how the Modi government and the other policymakers have responded to the Covid-19-induced economic stress?
 

The measures were too extreme even when compared to other countries, and for a developing nation like India were a risky bet from an economic standpoint. It was a difficult decision, but the bottom line is if one locks down the economy, daily wage earners are the hardest hit. The western world does not face this issue. This is the biggest human consequence -- more than the economic impact. Many (day labourers/migrants) have already gone back home assuming that they will at least get MGNREGA payments. But, there is always a risk that they take the virus with them to their villages.

That said, the Indian economy was already very weak before the virus set in. It had been weakening for several years now. The Rs 20-trillion stimulus is less important as compared to unlocking the economy. If you don’t have a lockdown, you don’t need a stimulus. It is wrong to blame Covid-19 for the economic downturn. What has caused the economic pain is the decision of governments across the world to go into lockdown. A developed economy can do a lockdown maximum for three months before the economic damage becomes too great. In a developing country like India, one month is the maximum. The most positive thing for the Indian stock market right now is that the lockdown is ending in most places.

Are you looking to increase exposure to Indian equities?
 

I have increased it marginally already and now I am in a wait-and-watch mode. My bigger issue from a one-two year view in the Indian context (assuming that the virus disappears in the next three months) is whether we have a fresh NPL cycle in the consumer-lending business. I have been overweight on China since the start of 2019. I have marginally increased my weighting in India four weeks ago, assuming that the lockdown would lift. The other positive for India, I believe, is domestic mutual funds continue to get inflows into equity schemes.