Not even a nuclear war can end the India story: Chris Wood

CLSA equity strategist Chris Wood has been in love with the Indian stock market for some years now, but on Monday he bared his soul to demonstrate just how deep that love runs. Even a “nuclear war”, he said in response to questions from DNA Money, couldn’t possibly end his love for Indian equities.

“India is the best long-term story in Asian equities,” Wood said on the sidelines of CLSA Investors’ Forum 2010 in Hong Kong. “The simple point about it is that it’s virtually the only economy in Asia that’s driven by domestic demand.” Most other countries in Asia, whose economies relied far more on exports to developed countries that are now in the throes of crisis, were looking to emulate the Indian growth model. India, he added, “is where the other Asian governments - from China down — would like to be.”

Wood, in fact, expects the India economy to grow more rapidly than even China in the next five years. “The Indian story is all about infrastructure, and if they get it right, India can grow 9% or more a year.”

Asked whether there were any circumstances in which he might “fall out of love” with the Indian market (which some foreign investors think is an “overloved market”), a smiling Wood said: “Perhaps if there’s a nuclear war, but otherwise no.”

He paused a moment, and added: “And even that would create a big buying opportunity.”

Although he’s “structurally bullish” on India, Wood acknowledges that there are circumstances in which the Indian market might not do as well in the short term.

Given the Indian market’s high correlation with global financial flows, it would probably underperform if the US markets fell. And tactically, in the short term the Indian market might be more expensive than China, which has been the worst performing market this year.

“So if I were putting new money in Asia today, I wouldn’t be putting it all in India.”  But nevertheless, Wood added, India’s weightage in the MSCI index benchmark is “ludicrously low.”

In Woods’ estimation, if the US administration responded to the weakening US economy with another round of quantitative easing, it would trigger another wave of outperformance in equity markets in Asia ex-Japan.

“The biggest beneficiaries of a second round of quantitative easing will not be US consumers but owners of Asian equities and Asian assets.”

And this time around, foreign portfolio inflows won’t “disappear” quickly because Asian economies had demonstrated their resilience and because there was a “lot less hot money” now in Asia.

Fears of high inflation in Asian economies are slightly overblown, except perhaps in India, reasons Wood.

“But the bottomline is this: it’s good news that there is inflation in Asia because it’s a sign that there’s growth, particularly income growth.”

And even in India, where food prices were driven up by a bad monsoon last year, overall inflation will come down, he adds.
In contrast to his “bullish” outlook on Asian markets, Wood confesses to being “cautious’ about markets in the West.

“My big picture view is that for now the western world remains in a deleveraging cycle,” he says. Nominal GDP was trending down in the US, and the rally in the US Treasury market was signalling weak growth.

“The bond market is 80% of the time more intelligent than the stock market, which tends to discount things only when reality hits it in the face.”

The Euroland, adds Wood, is in no better shape, and the sovereign debt crisis will resurface, now that “Europeans have come back from their summer outings in the beaches and started to go on strike - as in France.”

The odds favour risk aversion again in Euroland, and bond spreads in the peripheral European economies could rise again, he reckons.

The question for the next nine months in Europe, he adds, is this: will the peripheral economies take the pain and stay in the euro?
If they do, there could be a dramatic slowdown in Europe, but the euro could emerge a much stronger currency.

But if the political systems cannot take the pain, he sees “a series of fiscal crises” as inevitable.

But Woods is sure that if the Greeks cannot meet their fiscal targets, Germany and the core Euroland economies could work out an “exit mechanism” to kick out.

“Obviously, the more weaker members that are kicked out, the more you want to own the remaining euro.”