The brokerage has increased the country’s weighting by two percentage points in its Asia ex-Japan thematic equity portfolio with the money shaved off from China and Hong Kong. At present, 31% of Jefferies’ portfolio is in India
NEW DELHI: Christopher Wood, the global head of equity strategy at Jefferies, is bullish on the Indian market despite the lofty valuations and has increased India’s weightage as he believes that the country’s government is firmly pro-growth.
The brokerage has increased the country’s weighting by two percentage points in its Asia ex-Japan thematic equity portfolio with the money shaved off from China and Hong Kong. At present, 31% of Jefferies’ portfolio is in India (see table).
However, Wood believed that major risks to the rally in India included the arrival of a new covid-19 variant and the tapering scare, which is likely to be triggered by the US Federal Reserve slowly putting the brakes on its quantitative easing (QE) program. The other risk is a change in the dovish policy stance by the Reserve Bank of India (RBI).
“The easy money stance has clearly been one key driver of the rally, as in America, which is why India is likely to underperform in any global risk-off move triggered by tapering scares," Wood wrote in his research note titled, Greed & fear.
However, Jefferies will add India’s weight to its portfolio if the country corrects more sharply in an aggravated tapering scare.
The brokerage is structurally positive on the Indian market despite the lofty valuation at 21.5 times 12-month forward earnings, which may be a cause of concern for Jefferies.
“A new property cycle has commenced; a broader capital spending cycle should be coming sooner or later while the best companies have profited from deleveraging triggered consolidation in sectors like residential property and housing finance and indeed consumer finance in general. Meanwhile, the central government remains firmly pro-growth," Wood wrote.
The expert in his note also highlighted the resilience of the Indian stock market, which has been driven by a combination of growing retail investor activity and easy liquidity.
Jefferies’ head of India research, Mahesh Nandurkar, had recently noted that small retail ownership of BSE500 listed stocks reached a decade high of 7%. As per the Securities and Exchange Board of India (Sebi), a small retail investor is someone who invests less than ₹2 lakh.
There has also been the excitement generated by the arrival of the high beta profitless tech theme in the Indian stock market, with the listing of Zomato last month.
Meanwhile, the Fed minutes, which were released on Wednesday, showed that the US central bank is inclining towards reducing the pace of asset purchases this year. The original idea was for the tapering process to take place over a 12-month period in 2022.
In a bid to lift the US economy hit by the covid-led restrictions and lockdowns last year, the Fed is currently buying $80 billion and $40 billion a month of Treasury securities and agency mortgage-backed securities.
“From a market standpoint, a sense that tapering is coming sooner than expected could well cause some jitters in the risk-on trade in equities and give a reason for Treasury bond yields to move higher since the market assumption will be that an earlier than expected commencement of tapering will be bearish for Treasury bond prices since it means less Fed buying of Treasuries," Wood wrote.
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