'I remain structurally overweight on India'

CHRISTOPHER WOOD, managing director and equity strategist at CLSA, the Hong Kong-based brokerage and investment group, tells Puneet Wadhwa he remains overweight on emerging market equities and bonds in a global context. In the Indian context, he rema

Global markets are at new highs, even as economists are lowering growth forecasts. How do you read this?
Fundamentally, growth has been slowing for some time. In the specific case of Asian economies, there is evidence of growth stabilising. Interest rates have also been cut without currencies coming under downward pressure. Growth, or the lack of it, is much more of a developed world problem.
The most glaring feature of world financial markets right now is the contrasting messages sent by stock and bond markets. The US stock market remains as overvalued as ever. But, there remains a lack of any evidence of a deceleration in the share buyback boom.

Are bond markets now signalling a bubble-like situation for global markets? What are the risks  to watch out for?
The key risk would be G7 central banks losing credibility. Negative long-term government bond yields make no fundamental sense. However, that does not mean the bond bull market is about to end, since the US 10-year treasury bond yield is still a long way above zero. Meanwhile, ultra-low bond yields make it rational for investors to bid up the value of dividend paying stocks.
How does your global portfolio look?

I am overweight (on) emerging market equities and bonds in a global equity context. I would favour Japan over the US and Europe.

What about India, in the context of its economic outlook and  valuation?
I remain structurally overweight (on) India. I would be overweight (on the) private sector banks, housing finance companies, real estate, automobiles and cement.  
How are foreign investors viewing the passage of the goods and services tax (GST) Bill?
A key issue with GST is at what rate it will be levied. This has yet to be agreed. I still view (Prime Minister Narendra) Modi as by far the most pro-growth political leader in the world today. It is true that he has had a problem passing legislation because of obstruction by the Congress in the upper house. Still, this does not mean nothing has happened on the legislative front. A landmark bankruptcy Bill was passed in May, of huge long-term significance. Another development that has not received the attention it deserves was the passage of a Bill in March introducing long overdue regulation of the residential property sector.

You have been voicing concerns over India’s banking sector, especially public sector banks. Has the reform process addressed any of the concerns?
I continue to believe sorting out the banks is a bigger priority than GST, though both are obviously important. It is now time for the Narendra Modi government to address the PSBs, before the demands of the political election cycle take priority.
How are you viewing (Reserve Bank chief) Raghuram Rajan’s exit? What are your expectations from the new incumbent?
I am expecting accelerating of monetary easing but so is the stock market! There is potential for disappointment here.

Do you see crude oil prices going back to $20 a barrel levels over the next one year? What about gold?
I definitely believe oil could go back to $20 at some point, though I have no conviction on this on a one-year view. I have much greater conviction to remain long on gold, and to add to gold on weakness, though I would like to see more evidence of rising physical demand in India.
Gold-backed exchange traded funds  globally have seen a lot of investor interest this year. Does it indicate the possibility of a risk-off phase?
The rally in gold makes sense in the context of negative bond yields and declining real interest rates. The real trigger will be if there is renewed monetary easing in the United States.

Do you expect another round of quantitative easing by the US Fed?
I still believe there is more monetary easing coming in the US. But, my guess is that it could well take the form of monetisation of infrastructure stimulus — a fusion of monetary and fiscal easing. At the margin, the chances of a US Fed rate hike have gone up, though my view is still no rate hike in 2016.