“India, on the other hand, is in the middle of greed and fear,” he said.
Dow Jones Industries Average is up 47 per cent from its March lows and S&P500 41 per cent, while Nasdaq Composite has rallied 50 per cent to scale a new high. In India, BSE Sensex is up 35 per cent its 52-low of 25,638 hit on March 24 following the relentless rally seen through April and much of June.
A well-known global authority on emerging market equities, Wood says he prefers Indian equities to bonds. “India is a very attractive long-term equity story. However, the problem with the capex cycle and consumer lending are major concerns,” Wood said this past weekend.
He said concerns over consumer lending increased further when the country announced the lockdown.
The global head of equity strategy at the American brokerage Jefferies, however, said the economic human damage caused by the Covid-induced lockdown in developing countries like India was far greater than the harm caused by the virus itself.
“It was a crazy decision to go for the nationwide lockdown in developing economies,” he said. “You cannot afford to lock down a country like India for a quarter or maybe a month. That is why the government in India took a ‘U’ turn even when cases had not peaked,” Wood said.
Wood has generally been a firm backer of Prime Minister Narendra Modi throughout his two terms thus far, mainly because of the reforms the BJP government has introduced in the economy boldly.
Modi’s lockdown did earn him some brownie points initially for the foresight he showed in enforcing some bold measures to try to stem the spread of the virus.
But soon the government found itself in a soup as lakhs of migrant workers stranded in cities, swarmed the roads trying to hitch a hike to their villages, thereby badly impairing the social distancing measures.
Modi has since changed his stance, stressing that the economy should be allowed to function normally side by side the war on the virus.
This past week, he dismissed rumours of a fresh round of lockdown, and advised chief ministers to prepare for the next phase of unlocking.
The Covid disruption has already dented outlook for the nation’s GDP growth, corporate earnings and stock performance.
Wood says GDP and earnings growth projections are not important at this stage. “What is important is the progression of the virus, and how the government deals with the pandemic.”
“Projecting GDP and earnings growth is a sheer waste of time and efforts at this point,” he said.
Wood said while decisions taken by the US Fed and other global central banks have helped global markets recover from their lows, there are hopes that things will be back to normal by the third quarter of this financial year.
The emerging markets veteran said India, along with Indonesia, is staring at a humungous opportunity due to the Sino-US global trade war. “Competitive labour rates make these countries attractive,” he said, adding that friendly labour laws are the need for the hour in India.
He said people have already started moving production out of China to countries like Vietnam, Taiwan and Malaysia.
Wood, once known for his weekly institutional research newsletter titled GREED & Fear, said he used to like private sector banks in India but is now more comfortable with insurers. “There is also a huge consolidation going on in the residential real estate sector,” he said, adding that work from home will not be a long-term trend.
Commenting on the US technology giants, Woods said FAANG (Facebook, Amazon, Apple, Netflix and Alphabet (Google) stocks are clear beneficiaries of the ongoing Covid crisis, because their business models are supported by e-commerce. “They have a lot of cash. I am not seeing any change in market leadership,” he said.
At the same time, he believes the US market has become more expensive than the Japanese, European, Asian and other emerging markets.
“Quality of earnings on a macro basis is doubtful in America, because there has been a lot of financial engineering in last 10 years. Companies borrow money to buy back shares. Profits are overstated. Fundamentally, Wall Street is due for underperformance,” Wood said.
He said if economies move into high inflationary era, then there is a possibility that the high P/E (price-to-earnings) growth stocks would not see the same level of outperformance because a pickup in inflation tends to cause a contraction in multiples. “That time, there may be trade in cyclical value stocks,” he said.
Wood suggested a Barbell strategy for stock investors through this phase. “One should hold quality growth stocks and cyclicals or even both,” he said.
He also advised investors to keep aside 5 per cent of the portfolio in gold bullion and 5 per cent to gold mining stocks.
In his portfolio, Wood also has an allocation to bitcoins, as he said millennials are buying the cryptocurrency supply of bitcoin dropped last month. He also has exposure to fixed income assets, entirely in the emerging world.
“My portfolio is truly in Asian sovereign bonds in local currency. I have 50 per cent exposure to Chinese 10-year bonds, Singapore 10-year (20 per cent), Indonesian 10 year (20 per cent) and Indian 10-year (10 per cent),” he said.
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