In adversity lies opportunity. At a time when most global financial markets are grappling with coronavirus fears and the impact it may have on major economies, Christopher Wood, global head of equity strategy at Jefferies has used the recent market correction to hike China stake in his Asia Pacific ex-Japan relative-return portfolio.
The reason, Wood gave for this move is the fact that China has started to outperform world equities since the start of February in a hope that the worst may be over in terms of virus-infected people, while concerns grow that the number of cases will surge elsewhere.
"The MSCI China Index has risen by 4.1 per cent in US dollar terms since the beginning of February, while the MSCI AC World Index is down 4 per cent over the same period. This market action also raises the hope, at least, that investors will look through the likely horrible first quarter Chinese data," Wood wrote in his weekly note to investors, GREED & fear.
The hike in stake in the above-mentioned portfolio will be funded by paring stakes in Korea and India. As regards India, Wood believes the Narendra Modi–led National Democratic Alliance (NDA) government, or what is known as NDA-2, seems to be prioritising the social agenda over economic issues to a far greater extent than NDA-1.
“And the main difference between the two governments is that BJP President Amit Shah has now entered the executive branch as Home Minister. Shah and Modi go back decades in terms of Gujarat politics and their political affiliation with the Bharatiya Janata Party (BJP). Until proven otherwise, investors should assume they share the same agenda of saving, or at least preserving, the culture of the Hindu nation,” Wood wrote.
Besides, the recent economic data has also not been encouraging, which is another reason for him to pare India exposure. The latest Indian gross domestic product (GDP) data, released last Friday, still shows no clear sign of a cyclical uptick, though it is a positive that nominal GDP growth rose from a 10-year low of 6.4 per cent YoY in 2QFY20 (July-September 2019) to 7.7 per cent YoY in 3QFY20 (October-December 2019).
The key segment investors should keep a tab on, according to Wood, are the credit markets. This, he says, assume significance as the potential sudden collapse in economic activity triggered by the coronavirus, for example in the hospitality and transport industries, can clearly, from a cash flow perspective, make it hard for companies to service debt or refinance maturing debt.
“And there is a lot of debt about. Global non-financial sector debt totaled $187 trillion at the end of the third quarter of 2019 (Q3-19), including $72 trillion in corporate debt, according to BIS. But perhaps more relevant from a refinancing risk standpoint, global debt, including financial sector debt, rose to a record $253 billion, or 322 per cent of GDP at the end of Q3-19, according to the Institute of International Finance,” Wood wrote.