Chris Wood, Global Strategist, CLSA, said the US is headed for a slowdown as the credit problems are not sorted out. “The problem in structured finance is not over yet.” He feels slower US growth will affect markets but the trigger will be rate cuts.
Wood expects the Fed to ease rates further. “European Central Bank and Bank of England are expected to join in. The Fed easing may fuel a further rally in Asian and emerging markets.”
CLSA is currently long on Asia and emerging markets including India, he said. “We are overweight on India as it is the best bull market in Asia. Our India weightage is at 38%, which is the biggest in thematic portfolio. The long-term Sensex target remains at 40,000.”
According to Wood, RBI’s tightening is over and it’s only a matter of time before it cuts rates.
CLSA is structurally underweight on Indian IT due to the rising rupee. “The sector’s exposure to global financial services also a risk.”
Excerpts from CNBC-TV18’s exclusive interview with Chris Wood:
Q: Have we got a bottom in place for emerging markets for 2007?
A: If the US consumer data in the next few months and US employment data shows a material slowdown in US growth, I think emerging markets are vulnerable to a correction risk here, simply because of a correlation into slowing US growth concerns. If I am wrong on that view and the US consumer does not materially slow despite a slowdown in the American housing market, then it is clear that Asian and emerging markets’ stock markets bottomed in August.
My own base case is that we are going to see slowing data in the US. We have got a big employment number tonight, which is going to set the course in a next few days. I still think all these credit problems in the Western worlds have not been fully sorted out by any stretch for the imagination, so I am expecting more slowdown in the US.
I am expecting more Fed easing down the road. I am expecting ECB and the Bank of England to join in monetary easing later this year or early next year. All that monetary easing will be very bullish for Asia and emerging markets including India. Asia or emerging markets will rally on Fed easing just like we have seen in the last few weeks.
Then, the markets are going to be reminded that the American economy is actually slowing, the housing markets are still in a mess, and there will be a sell off again. There will again be more Fed easing and then there will be a rally. Ultimately, you want to remain overweight on Asia and emerging markets in a global portfolio.
Q: If the economic data is really weak and the Fed embarks on a more aggressive rate cutting cycle, do you think that will actually fuel more money and mania into emerging markets or do you think the markets will actually fall first anticipating a recession in the US?
A: We have just had a huge rally on the back of the first Fed rate cut. The reason why that rally has been so good and aggressive is simply because the Fed surprised people. Most people were expecting a 25 bps rate cut as everything Bernanke and the governor said indicated a 25 bps cut. I feel they cut 50 bps because of the Northern Rock fiasco in Britain, which preceded the Fed meeting. There was also heavy political pressure on the US central bank from the executive government. If we get slower growth, markets will correct on that. If the news flow is bad enough, you will get more Fed easing and then you will get another big rally. It is like a yo-yo effect.
If the economy data goes down, the Fed comes in and the market goes back up again. Ultimately, the way to play this is the same way you should have been playing it for the last 18 months. You want to be long on Asia and emerging markets including India and you want to be underweight on the western world and western financial stocks, who are geared into all these credit problems in the structured finance area that we read a lot off in July and August. We still have a massive problem in structured finance and that problem has not gone away.
The central bank is still pumping in billions of dollars. It is just that right now the markets have forgotten about it. Asia is getting an incredible following wind including India because the Asian multiples are being dragged up by the amazing bull market going on in Mainland China. This is dragging up Hong Kong-quoted China shares in the H-share market in Hong Kong and that in turn is dragging up P/Es in the rest of Asia.
Q: What is your call on India now as a lot of people seem to be now changing their earlier underweight stance on this market? Do you think that process is done or is this market overextended for you?
A: I was neutral in my relative return portfolio on India over the first half of this year because the central bank was tightening. I went slightly overweight in the middle of the year because I think this RBI tightening is over and it is a matter of time before RBI resumes easing. I do not think it will want to resume easing too quickly because of the equity market exuberance.
In my absolute thematic portfolio, I continue to have 38% of my Asian portfolio in India. It has always had the biggest weightage in my thematic portfolio in Asia. I continue to believe that India is by a long way the best quality bull market in Asia. I hold the heaviest investment in the best quality bull market story in Asia because India remains right now the only Asian economy driven primarily by domestic demand and not by exports. This means it is fundamentally less vulnerable to a US economic slowdown than other Asian countries like Japan, China, Korea, Taiwan, or Singapore.
Fundamentally, I still like the Indian story and any corrections to me is a buying opportunity. My long-term target for the Indian bull market remains what it has been since 2003. The bull market began in 2003 at 3,000 and my long-term target for the Sensex remains 40,000.
Q: What is your call on Indian power stocks? We have seen a phenomenal run in power stocks in the last few weeks, are you bullish on that sector or do you find the exuberance excessive?
A: I haven’t got a precise handle on the valuations as of today. Fundamentally, long-term infrastructure plays need to be a core part of the Indian portfolio because the big driver of the Indian growth cycle is investment in infrastructure cycle. Fixed capital formation has gone into a whole new trajectory of growth in India and it will continue to grow at a dramatic pace for the next 10 years. Therefore, the infrastructure and power area is got to be a key long-term core holding. This is why these stocks command such a high rating because people are very sure of the visibility of earnings.
Q: Are you underweight on Indian IT because of the rupee?
A: I would be structurally underweight on Indian IT simply because of the currency risk. The central bank doesn’t want the currency to go up too much. Fundamentally, if you believe the long-term Indian bull market story or the structural story, then it is illogical to believe that the currency is going to be going down. That long-term quality structural story implies an appreciating Indian currency and therefore one should assume a minimum 5% annualized appreciation.
Indian software companies have quite a significant exposure to the financial service sector globally. I am assuming that the financial service sector will encounter profit problems in the Western world. Logically, they should outsource more if they have to cut costs. To an extent, they have discretionary budget spending which they can slash. Indian software companies would be vulnerable to that.
So, the sector would not be my favourite area to invest in India because it is the most exposed to what my biggest concern is which is the external slowdown. But infrastructure is the opposite because that is very domestic
Wood expects the Fed to ease rates further. “European Central Bank and Bank of England are expected to join in. The Fed easing may fuel a further rally in Asian and emerging markets.”
CLSA is currently long on Asia and emerging markets including India, he said. “We are overweight on India as it is the best bull market in Asia. Our India weightage is at 38%, which is the biggest in thematic portfolio. The long-term Sensex target remains at 40,000.”
According to Wood, RBI’s tightening is over and it’s only a matter of time before it cuts rates.
CLSA is structurally underweight on Indian IT due to the rising rupee. “The sector’s exposure to global financial services also a risk.”
Excerpts from CNBC-TV18’s exclusive interview with Chris Wood:
Q: Have we got a bottom in place for emerging markets for 2007?
A: If the US consumer data in the next few months and US employment data shows a material slowdown in US growth, I think emerging markets are vulnerable to a correction risk here, simply because of a correlation into slowing US growth concerns. If I am wrong on that view and the US consumer does not materially slow despite a slowdown in the American housing market, then it is clear that Asian and emerging markets’ stock markets bottomed in August.
My own base case is that we are going to see slowing data in the US. We have got a big employment number tonight, which is going to set the course in a next few days. I still think all these credit problems in the Western worlds have not been fully sorted out by any stretch for the imagination, so I am expecting more slowdown in the US.
I am expecting more Fed easing down the road. I am expecting ECB and the Bank of England to join in monetary easing later this year or early next year. All that monetary easing will be very bullish for Asia and emerging markets including India. Asia or emerging markets will rally on Fed easing just like we have seen in the last few weeks.
Then, the markets are going to be reminded that the American economy is actually slowing, the housing markets are still in a mess, and there will be a sell off again. There will again be more Fed easing and then there will be a rally. Ultimately, you want to remain overweight on Asia and emerging markets in a global portfolio.
Q: If the economic data is really weak and the Fed embarks on a more aggressive rate cutting cycle, do you think that will actually fuel more money and mania into emerging markets or do you think the markets will actually fall first anticipating a recession in the US?
A: We have just had a huge rally on the back of the first Fed rate cut. The reason why that rally has been so good and aggressive is simply because the Fed surprised people. Most people were expecting a 25 bps rate cut as everything Bernanke and the governor said indicated a 25 bps cut. I feel they cut 50 bps because of the Northern Rock fiasco in Britain, which preceded the Fed meeting. There was also heavy political pressure on the US central bank from the executive government. If we get slower growth, markets will correct on that. If the news flow is bad enough, you will get more Fed easing and then you will get another big rally. It is like a yo-yo effect.
If the economy data goes down, the Fed comes in and the market goes back up again. Ultimately, the way to play this is the same way you should have been playing it for the last 18 months. You want to be long on Asia and emerging markets including India and you want to be underweight on the western world and western financial stocks, who are geared into all these credit problems in the structured finance area that we read a lot off in July and August. We still have a massive problem in structured finance and that problem has not gone away.
The central bank is still pumping in billions of dollars. It is just that right now the markets have forgotten about it. Asia is getting an incredible following wind including India because the Asian multiples are being dragged up by the amazing bull market going on in Mainland China. This is dragging up Hong Kong-quoted China shares in the H-share market in Hong Kong and that in turn is dragging up P/Es in the rest of Asia.
Q: What is your call on India now as a lot of people seem to be now changing their earlier underweight stance on this market? Do you think that process is done or is this market overextended for you?
A: I was neutral in my relative return portfolio on India over the first half of this year because the central bank was tightening. I went slightly overweight in the middle of the year because I think this RBI tightening is over and it is a matter of time before RBI resumes easing. I do not think it will want to resume easing too quickly because of the equity market exuberance.
In my absolute thematic portfolio, I continue to have 38% of my Asian portfolio in India. It has always had the biggest weightage in my thematic portfolio in Asia. I continue to believe that India is by a long way the best quality bull market in Asia. I hold the heaviest investment in the best quality bull market story in Asia because India remains right now the only Asian economy driven primarily by domestic demand and not by exports. This means it is fundamentally less vulnerable to a US economic slowdown than other Asian countries like Japan, China, Korea, Taiwan, or Singapore.
Fundamentally, I still like the Indian story and any corrections to me is a buying opportunity. My long-term target for the Indian bull market remains what it has been since 2003. The bull market began in 2003 at 3,000 and my long-term target for the Sensex remains 40,000.
Q: What is your call on Indian power stocks? We have seen a phenomenal run in power stocks in the last few weeks, are you bullish on that sector or do you find the exuberance excessive?
A: I haven’t got a precise handle on the valuations as of today. Fundamentally, long-term infrastructure plays need to be a core part of the Indian portfolio because the big driver of the Indian growth cycle is investment in infrastructure cycle. Fixed capital formation has gone into a whole new trajectory of growth in India and it will continue to grow at a dramatic pace for the next 10 years. Therefore, the infrastructure and power area is got to be a key long-term core holding. This is why these stocks command such a high rating because people are very sure of the visibility of earnings.
Q: Are you underweight on Indian IT because of the rupee?
A: I would be structurally underweight on Indian IT simply because of the currency risk. The central bank doesn’t want the currency to go up too much. Fundamentally, if you believe the long-term Indian bull market story or the structural story, then it is illogical to believe that the currency is going to be going down. That long-term quality structural story implies an appreciating Indian currency and therefore one should assume a minimum 5% annualized appreciation.
Indian software companies have quite a significant exposure to the financial service sector globally. I am assuming that the financial service sector will encounter profit problems in the Western world. Logically, they should outsource more if they have to cut costs. To an extent, they have discretionary budget spending which they can slash. Indian software companies would be vulnerable to that.
So, the sector would not be my favourite area to invest in India because it is the most exposed to what my biggest concern is which is the external slowdown. But infrastructure is the opposite because that is very domestic
