The main risk to investors in Indian equities, from a US dollar return perspective remains the rising oil price, writes Christopher Wood, managing director, equity strategist at CLSA in his weekly note GREED & fear.
Prices for global benchmark Brent crude shot above $80 a barrel Thursday, as Washington’s decision to reinstate sanctions on Iran extended a rally that has pushed the market to their highest level since 2014. In the past one year alone, Brent oil price has flared over 56 per cent, data shows.
Besides the rupee and oil, another threat for the Indian markets, Wood highlighted recently, was a sharp slowdown in mutual fund inflows. This risk grows the more the stock market declines. Still the good news is that so far inflows have slowed but not yet collapsed, let alone turned into outflows.
Though he is not too concerned about the fiscal slippage ahead of the general elections, Wood cautions on the steep valuation of Indian equities, especially in the mid-cap segment.
In terms of sectors, the best stories to invest in in India remain the affordable housing theme and the dramatic, albeit healthy, consolidation of the residential property market triggered by the “double whammy” of the Real Estate Regulation Act (RERA) and demonetisation
Predicts Modi win
Despite a clear mandate eluding the Bharatiya Janata Party (BJP) in the recently held assembly election in Karnataka that was seen as a semi-final to the general elections scheduled for 2019, global brokerages expect the Narendra Modi – led party to assume a second term.
In his weekly newsletter, Wood says his base case remains that Narendra Modi and the BJP will win again, albeit probably with a reduced majority. This is because the Indian Prime Minister is a formidable campaigner and some of the positive consequences of his policies should by then be clear at the ground level, he says.
Wood, however, cautions that it still is premature to focus on Indian politics before the fourth quarter, as the general election not due to be held until April-May 2019.
Recently, a report by UBS had also suggested that global investors are presuming the Modi government to return to office in 2019, and that the markets are already factoring in this possibility at current levels.
The other reason Wood believes Modi will be re-elected is that he is focused on implementing policies that impact positively on ordinary people’s lives. “There will also be the inevitable pickup in more “populist” policies ahead of a general election. Modi also has a track record of targeting policies that appeal to women voters,” Wood says.