Gurugram: Christopher Wood, managing director and equity strategist at CLSA, said the National Democratic Alliance (NDA) government scores eight out of 10 on the progress made on economic reforms. “The reason it’s not 10 is a big mistake made by the Modi government in not addressing banking problems immediately," Wood said, adding demonetisation has helped weed out so-called black money.
“It was a brave step politically as it hurt small businesses, which were the supporters of the BJP (Bharatiya Janta Party)," he told reporters at the CLSA India Forum.
“I support the real estate regulation Act. Good developers will take advantage of this, but obviously there is some near-term collateral damage," said Wood.
The government has also introduced the landmark bankruptcy law, Wood pointed out.
He expects a lot of volatility in the Indian markets in the run-up to the general elections next year, he said, adding that he cut his India rating to double overweight from triple overweight at the start of this year.
“I am not changing my Indian asset allocation," Wood told reporters.
“If I am overweight India, I want to own energy stocks elsewhere to hedge the biggest risk in India—the oil prices," Wood said, adding they could rise to as much as $150 a barrel.
He expects crude oil prices to go up although prices have seen a sharp decline recently—Brent crude has plunged 23.2% to $66.3 per barrel from its recent peak of $86.29 on 3 October.
“The key risk is oil price, and key risk for financial sector is more skeletons in the closet, but for the aggregate market it is oil price," said Wood.
“I will raise my allocation to India if I see evidence of a pick-up of the investment cycle, which I am expecting next year," Wood said.
The biggest risk to the rupee and the economy, according to Wood, is a strengthening dollar. The Indian currency has depreciated 11.67% year to date and currently trades at 72.31 per dollar.
Indian stocks have also declined. The benchmark Sensex fell 9.87% from its record high of 38,989.65 on 29 August.
The correction was aggravated due to defaults and rating downgrades at Infrastructure Leasing & Financial Services Ltd. (IL&FS), and the way it affected other non-banking financial companies (NBFCs).
“That is a disaster," he said, referring to the defaults and downgrades of IL&FS.
“Up to the end of August, my portfolio was outperforming in this bad year, but that single event has clearly thrashed those stocks," he said.
“It is not just the credit rating agencies…Where were the regulators? There is again a legitimate criticism from the point of view of the government," Wood said expressing his concerns, and added that NBFCs’ growth would slow down.
As a knock-on impact, he was worried that the real estate market, which was in early stages of recovery after an extended downturn would be impacted.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!