Animal spirits? Chris Wood surprised by resilience of Indian stock market

Christopher Wood, global head of equity strategy at Jefferies who expected calendar year 2022 (CY22) to be a period of consolidation for the Indian stock markets after the strong gains in 2021, is surprised by its resilience in the backdrop of a monetary tightening cycle by the central banks.

“From a stock market standpoint, GREED & fear has been viewing calendar 2022 as a year of consolidation for the Indian stock market after the strong gains recorded last year and the negative of the commencement of a monetary tightening cycle. Still the reality is that the Indian market has so far surprised everyone, including GREED & fear, by its resilience in the face of bearish sentiment triggered by the wave of foreign selling, prevailing high valuations and monetary tightening. This resilience should be viewed as reflecting the strength of the structural story,” Wood wrote in his recent note to investors, GREED & fear.

The Nifty has rebounded by 16.5 per cent since mid-June, while the MSCI India Index has outperformed the MSCI AC Asia Pacific ex-Japan Index by 16.5 per cent since late June. Even in a phase of market correction, the Indian stock market stood tall. The MSCI India declined by 5.8 per cent in US dollar terms year-to-date, compared with a 24 per cent decline in the MSCI China and 18.5 per cent drop in the MSCI AC Asia Pacific ex-Japan Index, data show.

The sharp rally in the Indian equities since July has mostly been led by foreign investors, who remained net buyers (of Indian stocks) in the past six weeks, buying a net $7.64 billion since mid-July. In the first six-and-a-half months of 2022, they sold a net $29.7 billion worth of Indian stocks, data show.

Further evidence of economic resilience and animal spirits, according to Wood, is continuing strong goods and services tax (GST) revenues and buoyant retail sales. GST collections rose by 28 per cent YoY to Rs 1.49 trillion in July, the second-highest level ever.

This sharp rally in Indian equity markets since July 2022 has made analysts tactically cautious with Mahesh Nandurkar, managing director at Jefferies expecting a 15 per cent correction amid rich valuations.

“India’s 10-year government securities rate has fallen from the recent peak of 7.62 per cent in June, down to 7.35 per cent. However, the market 12-month forward price-to-earnings has gone up to 19.3x, driving the bond yield-earnings yield gap up to 2.2 percentage points, which is 113-basis point higher than average. A potential mean reversion would imply a 15 per cent correction,” Nandurkar wrote in a recent report co-authored with Abhinav Sinha.

Despite this, in his Asia ex-Japan long-only portfolio, Wood maintains a dominant 40 per cent weight on India since he believes India is by far the best structural story in Asia.

“In a year of monetary tightening, the 30 per cent weight in the Indian financial and property sectors in the Asia ex-Japan portfolio means these stocks have been tactically vulnerable in 2022 after going vertical last year, particularly in the case of property stocks. Still GREED & fear is going to stick with the structural story in terms of the Indian portfolio exposures since these are long-term portfolios not tactical benchmark tracking exercises. Affordability measures for Indian homebuyers are also much better than for most countries,” Wood said.