In no hurry to add to India position; buy only on a dip: Chris Wood

Given the macro headwinds - the need to tighten monetary policy combined with the risk of a much higher oil price, are the key reasons Wood has been in no hurry to add to the 'overweight' position

India remains Asia's best long-term structural story in terms of equities and investors should buy their favourite stocks on a decline, suggested Christopher Wood, global head of equity strategy at Jefferies in his latest note to investors, GREED & fear.

However, given the macro headwinds – the need to tighten monetary policy combined with the continuing risk, if not probability, of a much higher oil price, are the key reasons Wood has been in no hurry to add to the 'overweight' position he has in Indian equities in his Asia ex-Japan portfolio.

"GREED & fear had been expecting India to underperform in the Asian context in the first quarter of this year, as it probably would have done were it not for the further collapse in Chinese equities triggered by President Xi Jinping's decision to double down on the Covid suppression policy. This had also been the expectation of foreign investors, which is why there was record foreign selling of Indian equities in the first quarter of this year," Wood said.

Foreign investors in sell mode

Meanwhile, foreign investors, according to data, have sold a record net $13.5 billion worth of Indian equities in the first quarter of calendar year 2022 (Q1-CY22) and another $3.8 billion in April. Of the total outflow of $17 billion seen over the last four quarters, according to a Jefferies note, active funds (India-dedicated and Non-dedicated) accounted for a large portion of this outflow.

"Passive India-dedicated funds also have witnessed some outflow over the last four quarters. The bleed was, however, stemmed to an extent by Sovereign Wealth Funds (SWFs) pumping in an estimated $6.5 billion. Our recent investor meetings indicate that active managers have reduced India weight by 50-100 basis points (bps) over the last 6-12 months on valuation concerns," wrote Mahesh Nandurkar, managing director at Jefferies in a report co-authored with Abhinav Sinha.

All this has kept investors on edge and the markets have lost considerable ground. In the last one month alone, the prospects of a faster-than-expected hike in interest rate by the global central banks, especially the US Federal Reserve (US Fed) to tame inflation has seen a sell-off in equities.

Back home, the S&P BSE Sensex and the Nifty 50 have slipped over 7 per cent each in the last one month. On Friday, both the indexes lost ground – triggered by a sell-off in the US markets that saw S&P 500, Nasdaq Composite and the Dow Jones Industrial Average tank 3.51 per cent, 4.90 per cent and 3.03 per cent, respectively in the worst single-day sell-off since 2020.

Wave of redemptions
 

US equities, Wood had warned last week, are likely to be hit by a ‘wave of redemptions’ as the US Fed tightens its monetary policy and winds down its bond-buying program.

US domestic equity exchange traded funds (ETFs) recorded an estimated net outflow of $20.7 billion in the week ended 20 April, following a net outflow of $7.9 billion in the previous week.

"This is a reminder that before the monetary tightening-triggered correction or bear market, call it what you will, is over US stocks are likely to be hit by a wave of redemptions. And because many of the ETFs own the same big cap stocks, it is likely to lead to significant declines in the previous market leaders. There are, for example, 14 ETFs traded in America indexed to the S&P 500 with total assets under management of nearly $1 trillion," Wood wrote.

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