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'If you look at where inflation (headline and core) is today in India and where the rates are, there's clearly room to cut rates.'
The US Federal Reserve (US Fed) surprised the global financial markets with a higher-than-expected rate cut of 50 basis points (bps).
Puneet Wadhwa/Business standard caught up with Christopher Wood, global head of equity strategy at Jefferies in New Delhi on his interpretation of the Fed's move, its implications for global markets and his stand on Indian equities.
What's your reaction to the rate cut and the commentary by the US Fed?
I'm surprised the US Fed cut rates by 50 basis points. The language and the data going into the Fed meeting suggested that the cut would be 25 bps. So yes, to that extent I'm surprised.
Will the quantum of cuts be similar in the meetings ahead? Is the '50' the new '25'?
No, I don't think they raised expectations of a 50 bps cut in the next meeting.
I think they raised expectations of 25 bps by the end of the year. The bottom line is that I'm surprised they cut rates by 50 bps.
Some people will be arguing that it means that the US Fed thinks the economy is much weaker, but actually, that's not what they said.
In the absence of any other explanation, I think at the margin, the rate cut must be influenced by political compulsions.
How do you see global markets play out from here on, especially India?
For emerging market asset classes in general, the Fed cutting rates is good. On top of that, the dollar has been weakening.
All this augurs well for the emerging market equities, including India.
Indian markets are already at an all-time high. From the standpoint of foreign institutional investors (FIIs), they have been waiting for the markets to correct so that they can buy.
That said, there are other EMs that are more sensitive to a weaker dollar and rate cutting than India.
Which markets would they be?
Well, the classic emerging market would be Brazil, as they've got very high interest rates and have a huge potential to cut rates because of the Fed's cutting.
Southeast Asia is more sensitive to weaker dollar lower rates than India. I mean, the RBI can now cut rates too, but my sense is the Reserve Bank of India is in no hurry to do big rate cuts.
Every Asian economy I look at, including India, could have already had cut rates. And the reason most of them have not cut rates, including the RBI, is because they didn't want to undermine their currency.
However, if you look at where inflation (headline and core) is today in India and where the rates are, there's clearly room to cut rates.
With the US Fed now cutting rates, do we expect the emerging markets to start on outperforming the developed market peers?
Yes, if the rate cut is combined with a weaker dollar then the EMs should do well. I'm talking about emerging markets, ex-China.
China's in its own cycle and will have a sustainable equity rally only if there's evidence that it is coming out of deflation. As of today, there's no such evidence.
The initial instinct of FII money would be to be investing in places like Brazil and Southeast Asia, which are more rate sensitive.
How much importance are you giving to the US election outcome now?
The most important aspect of the US election is that there's a clear victory for one side, and it's not disputed.
From a stock market perspective, Donald Trump's victory will be good as it will trigger a big deregulation. However, neither of the candidates are focused on fiscal deterioration right now.
You've had a very bullish view on India since quite some time. Is it time to alter that view as the run up has been purely based on liquidity?
Not really, but the valuations are expensive in India. The run up has been on account of incredibly huge inflows from the domestic investors.
That's a long-term structurally positive thing. However, there's definitely a case for some tactical caution on Indian equities from a short-term perspective.
But one wants to stay invested, one could probably increase exposure to banks and consumer staples sectors.
In a bull market, any stock can correct by one-third at any time. Market corrections in a bull-market are short, sharp and violent.
The big surprise to me was the announcement of a capital gains tax increase and the market's resilience to the move.
To me, this is really amazing. People were not expecting that capital gains tax will be increased.
Which sectors in the Indian context still hold promise according to you?
From a five-year view, the center of the 'India story' is in infrastructure, real estate and energy.
These are the areas where the real momentum is. And what's happened in the last year is the stock market run up has been partly confirmed by growing evidence of a private sector capex cycle in most sectors.
This time last year, the hope was that the private sector capex cycle was picking up, but actually there wasn't that much there and there wasn't so much evidence.
The best evidence was that the capex stocks were going up in the stock market, as opposed to real world evidence. But in the last year, we got more and more real world evidence.
What's the sense you get from talking to investors and the government now in this third annual Jefferies India Forum? Are there any worrying points?
My sense is the government's got a clear vision they're working on and executing.
Their aim, it seems, is to basically grow at a stable manner of between 6 to 8 per cent real GDP growth rate.
On a five-year view, 6 to 8 per cent growth is healthy, which is in nominal terms, probably in the 10 to 14 per cent range.
The other thing I've picked up from listening and talking to people in India related to the government is there seems to be less focus on passing new laws and much more focus on deregulation in terms of trying to reduce the number of unnecessary permits, rules and regulations that are the legacy of the license raj.
How important are the state elections in India for stock market stability?
From a stock market perspective, they are not much relevant.
In the next one year, do you expect muted returns from the Indian market?
I am tactically cautious about the Indian market from a short term view. That said, I'm not changing my long term portfolio as I am bullish on the Indian stock market from a 5 to 10 year horizon.
The biggest risk of a big correction in the Indian market, to me is the same risk for all other markets is geopolitics.
That's where the biggest risk of a correction comes from. If you had a correction triggered by geopolitical concerns, it would hit all equity markets, and not just India.
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Feature Presentation: Rajesh Alva/Rediff.com
