New investment cycle nearer than expected: Chris Wood, CLSA

Indian equity markets resilience may be a signal that a new investment cycle is nearer at hand than the consensus thinks, said Christopher Wood, CLSAs chief strategist, in a note.

Wood said this would mean that the stock market will be much more resilient to monetary tightening and a higher oil price than currently assumed.

“…the stock markets resilience may also be a sign that India is contra-cyclical in the sense that the economy is accelerating at a time when many other markets in Asia could be near their cyclical peak. When that new investment cycle commences, it will be very bullish for the stock market,” said Wood, adding that this is the main reason why he is less concerned about the high valuations in the Indian market.

It would also mean that any correction will be a buying opportunity, said Wood.

The Sensex is up 13.5 per cent so far in calendar year 2018 compared to the MSCI Emerging Market Index, which is down 8.7 per cent in the same period.

“The MSCI India has also risen by 10.2 per cent since bottoming out in late May, while the Asia-Pacific ex-Japan and emerging markets benchmark indices are down 4.1 per cent and 5.5 per cent over the same period. This is all the more impressive given that the rupee is down 9.5 per cent year to date,” said Wood in the note.

Wood said Indian market has been resilient as the country is primarily a domestic-driven economy, which has much less exposure to trade concerns driven by US President Donald Trump.

The continuing resilience of inflows into Indian domestic equity mutual funds is another reason for the stock markets resilience this year, he said.

“Net inflows into domestic equity mutual funds, excluding arbitrage funds, totalled $16 billion in the first seven months of this year, compared with $12.4 billion in January-July 2017. This increasingly looks like it is a secular, not a cyclical phenomenon, in which case it is extremely bullish,” said Wood.

Wood had cut the overweight in India from a triple to double in the relative-return portfolio, but the firms long-only portfolio remains 48 per cent invested in India.

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