Indian equities are in a bull-phase; buy on dips: Chris Wood

Giving a thumbs-up to the Budget 2022 that delicately balanced capex spend and demand push, CHRISTOPHER WOOD, global head of equity strategy, Jefferies, tells Puneet Wadhwa in an interview that the key takeaway for him is that the proposals are a continuation of what the Finance Minister had proposed in the last year’s (2021) budget. Edited excerpts:

What is your interpretation of the budget proposals?

The government has focused rightly on capex and I am not really worried about the impact on the fiscal deficit. The more important point here is that the Indian government is spending money on building infrastructure and not on transfer payments. This had been the trend last year as well when the government chose to spend money wisely. It is more constructive spending. That said, I think the budget is more conservative on revenues.

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To me, a budget is a good one if it does not create headlines and that's what the Indian budget has proved to be. The key takeaway, according to me, is that the proposals are a continuation of what the Finance Minister had proposed in last year's (2021) budget. The Indian government now has pegged the gross domestic product (GDP) growth rate of 8 – 8.5 per cent for fiscal 2022-23 (FY23), which is a respectable figure despite a high base effect.

Do you think the proposals can be inflationary at a time when the oil prices are already on a boil?

I am not too worried on that front either. Rising oil prices will impact global markets as well and I believe oil prices are headed higher. This is primarily a US, G-7 issue and not specifically an Asian or an Indian issue. While India has to deal with high inflation in the past, the US and Eurozone have dealt with far more serious inflation-related issues in the past and continue to do so.

How do you view the Indian equity markets in this backdrop?

The Indian markets have been looking overvalued since the last few quarters, but they have still done well despite this. All this suggests that they expect the earnings growth to come through. I hope we are at a similar stage in the Indian economy where we were in 2002-03 when the real estate / housing cycle began in India. If this parallel to the past holds true, we should get accelerated GDP and corporate earnings growth. Back then, the Indian stock markets did well and proved resilient to higher interest rates. This may well be true now, too. The key development last year (from an economic standpoint) was that there was evidence of a turn in the Indian housing cycle after a seven-year downturn. I remain structurally bullish on India.

Are the risks to Indian equities more from domestic issues or external factors?

The two big external risks for the Indian stock markets that will cause a correction are the US Fed's policy action and rising oil prices. Investors should use corrections to add to their equity allocation. The best way to hedge oil-related risk is to own oil stocks. In the short-term, however, a resolution of the crisis in Ukraine can see oil prices drop – but this will only be for a short span of time. Higher oil prices are being driven by not only higher demand, but by tight supply conditions as well.

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What's your advice to retail investors?

My advice is not to own equities on margin, invest regularly every month and use any meaningful corrections to buy. I suggest buying every month as I believe the US Fed’s policy tightening cycle will lead to volatility and give opportunities to buy on a correction. So long the US Fed is perceived to be behind the curve on inflation, there will be a lot of volatility that will create buying opportunities. Indian equities are in a bull-market and one should just stay invested. I still have 20 per cent weight to energy-related stocks in my India-focused portfolio.

Is it the right time then to look at infra / capex-related plays in India?

If we get a broader capex cycle, it should benefit the related stocks. All this will help improve corporate earnings going ahead. So in that sense, if we follow the 2002-03 analogy, the uptick in property cycle was followed by a broader capex cycle. I am hoping that this will happen this time around as well. As things stand right now, there is much more evidence of the capex cycle coming through than the housing cycle. The private capex cycle should also start to pick up; this is a kind of a relay race, which I am hoping to see over the next two years.

Do you see the rate hikes by the US Fed as consensus believes will come through?

Yes, definitely. They will raise rates in March 2022. The point that the markets do not know at the current juncture is what the US Fed will do to contract its balance-sheet, which by March 2022 will be $9 trillion.