Will buy Indian stocks if Nifty drops to around 14,000 levels: Chris Wood

In the short-term, Wood suggests that investors should sell stocks on a rally. The bet for a sustained equity market rally before 2022 end is a possible change in the US Fed's language, he said

Markets have found it tough to cling on to higher ground. CHRISTOPHER WOOD, global head of equity strategy at Jefferies advises that investors should look to sell stocks on a rally in the short-term. What will see the markets rally is a sudden end to the Russia – Ukraine conflict as it will ease supply pressure across commodities, he tells Puneet Wadhwa in an interview. Edited excerpts:

Do you expect the US Fed’s language to change to a softer tone anytime later this year?

The US Fed has been under pressure to do something about inflation since the fourth quarter of 2021 (Q4-CY21). Rising prices have been the biggest concern of Americans, opinion polls show; and people are blaming the administration for this. As a result, the US Fed is doing a massive catch up. Once the implications of the (monetary policy) tightening become clear in the next few months, then the political pressures may change and the US Fed’s stance may also change as a result.

 

The US mid-term polls are due later in 2022. Can that be the turning point for the US Fed to alter course?

Absolutely. But my guess is that the change will come around late in the September quarter. Though higher prices are a concern, there is also an economic damage that the monetary policy tightening will do, especially to the stock market. Then the politicians may pressure the Fed to back-off a bit. If the Fed backs off without getting inflation down to 2 per cent, it will indicate that they are willing to tolerate higher inflation.

Your recent advice was to sell the rallies. Do you still maintain this view? Any silver lining for the market?

For the short-term, I still maintain the view that investors should look to sell stocks on a rally. What will see the markets rally is a sudden end to the Russia – Ukraine conflict as it will ease supply pressure across commodities. Crude oil prices, too, may soften. Though all this may trigger a relief rally in the markets, there is no evidence of this happening as things stand. Right now, the best outcome looks like a stalemate. That said, the best bet for a sustained equity market rally before the year ends is a possible change in the US Fed’s language.

What’s your view on the Indian markets?

I have been looking to raise my India weighting and will buy Indian equities if the Nifty drops to around 14,000 or 14,500 levels. It can slide to these levels in case the US Fed does not alter its course over the next few months. India does not have the same inflation-related problem structurally as the US. That said, one cannot rule out the rising inflation in India, which needs redressal. A risk for the Indian markets is a sudden rise in crude oil prices due to any geopolitical issue. Another thing one needs to monitor is how long domestic institutions and investors continue to absorb the foreign selling.

If the Indian markets were to correct, say another 10 per cent from here, do you think the retail investors and domestic institutions would start to panic and exit? 

Yes, there is a chance of this happening and the Nifty50 can then slip to 14,000 mark. I expect foreign funds to start buying at that level. Foreign investors have been selling Indian equities for many months now; and for me, 14,000 on the Nifty will be when the foreign money will start to come back in.

You were in India recently. What's the general sense you're getting after meeting companies and investors? 

Well, they understand the issues related to monetary tightening but remain upbeat. The property market in India is turning up and is likely to sustain despite the rising rates. There is optimism that the capex cycle will pick up in India. The concern, however, is can the overall risk-off sentiment globally delay the capex cycle? I feel the property market will not be disrupted by rate hikes. The real risk to the Indian economy, in my view, is from the US Fed actions and a possible spike in oil prices. That said, the Indian economy is resilient enough to withstand this. However, the fiscal cost of subsidies still remains a problem for India. Corporates are prepared for capex, but feel there can be a delay due to monetary tightening.

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A lot of heavy lifting was to be done by the corporate earnings as regards supporting the market valuation before the Russia - Ukraine war started and the world woke up to inflation-related woes. Do you still see that happening over the next few quarters?

One key reason why foreigners were selling Indian equities was that valuations were at the peak of the range then. With monetary tightening, there was a clear risk on earnings. The markets, on their part, had not priced in that risk at the beginning of 2022. A clear surprise has been that how the domestic institutions and retail investors have continued to pour in money. A large part of this is attributed to the fact that there have been no meaningful earnings downgrades yet. Jefferies expects 15 per cent earnings growth in fiscal 2022-23 (FY23) for India Inc despite the global and domestic developments.

So, if the Nifty was to fall to 14,000, which sectors and stocks will be on your shopping list?

I will increase the weight of the stocks I already own. Right now, my favourite sector is energy, but my core holding is still private banks. That said, I do expect crude oil to hit $150 a barrel mark going ahead.

Your long only India portfolio is heavy on financials with around 43 per cent weight. Don't you think there is inherent risk in keeping it skewed so much in favour of financials at a time when rates are rising, which can hurt loan growth and bank's profitability?

Well, that’s a long-term portfolio and not a tactical one that I started in 2021. It has a mix of financials, property, energy etc. Had I been running this portfolio tactically, I would just own energy stocks this year. The corporate sector is significantly deleveraged and is in a much better position to make fresh investments. The banks, too, are much more cleaned up. Therefore, an increase in lending should not be a problem.