Chris Wood reduces India overweight on J&K issue

MUMBAI: Indian government’s move to change the constitutional status of Jammu and Kashmir earlier in August has added an additional negative for the Indian markets amid weak economy and corporate earnings, said Christopher Wood, global head of equity strategy at Jefferies in his weekly newsletter 'Greed & Fear'.

Wood has reduced its overweight on India by a further one percentage point in favour of Indonesia where he believes the investment case looks much more straightforward.

“The Kashmir aggravation has added an additional negative... it can also be argued that Modi should not have allowed himself to be distracted by the execution of the BJP agenda on Kashmir, which like demonetisation was planned in great secrecy with many cabinet ministers kept in the dark, when all the evidence is that the Indian economy continues to weaken,” said Wood.

Wood said he is assuming that the security situation in Jammu & Kashmir will get worse.

“(The order) ...has given much greater credibility to the longstanding attack on Modi by his domestic critics that his agenda is to build a Hindu ‘majoritarian’ state and turn India into ‘Hindustan’,” said Wood.

Economic Woes

Wood said he is not so sure what the government can do about the economy in the short term. Some of this slowdown, particularly in the auto sector, reflects the continuing liquidity squeeze in the NBFC space triggered by the default of formerly Triple-A rated IL&FS a year ago, he said.

The problem of loan issue in public sector banks remains one area where the government policy could have been more pro-active, said Wood. The process of writing off the bad assets and putting them in more credit worthy hands is taking longer than hoped as defaulters seek to hold on to their assets by judicial appeal, he said.

“The legacy problems in the public sector banks, and the continuing tight liquidity in terms of extended loan deposit ratios and the like, mean that monetary easing will continue to be not as effective as hoped in the sense that the rate cuts are not being passed on fully to borrowers,” said Wood.

Valuations

Valuations of the Indian stock market are not cheaper despite the 10% decline in the Nifty from its lifetime high of early June, said Wood.

The Nifty trades at 16.7 times one-year forward price-to-earnings, compared with an average of 15.2 times since 2008. Continued inflows into domestic mutual funds remains a positive, said Wood. Equity investors are going to need to see evidence of a cyclical pickup to get excited since more monetary easing is already assumed, and there will remain legitimate scepticism about the impact of such easing, he added.