Chris Wood Portfolio: Private sector capital spending drives India market boom: Chris Wood

“The last time we had a private sector capital expenditure “The investment cycle in India between 2002 and 2009 has been spectacular. The Indian stock market has outperformed spectacularly in an Asian context and has done so so far, once again this time. And obviously that investment cycle in real estate follows a four-year upturn in the housing cycle, which we also believe will continue,” he says. Chris Wood, Jefferies.

For a long time, you had been expressing concerns about private sector capex and the fact that the cycle had not started as expected. But on your recent visit, and now that you have interacted with many companies on the sidelines of the Jefferies India conference, what is your view on the private sector capex cycle in India?
Chris Madera: Well, on that point I think it’s very simple, but we are firmly convinced that the private equity investment cycle is underway. So, at the previous Jefferies conference in India 15 months ago, we made that argument and we thought that it had already started. There was no very clear macroeconomic data to support that view. Actually, the best sign that the private equity investment cycle and the private sector equity investment cycle were starting was the fact that the private equity stocks were picking up.

But 15 months later, there is clear evidence across most quarters of a pickup in private sector capital spending and that is the key reason to remain optimistic about the Indian equity market in the medium term.

So the way we see it and the way I see it is that the government’s capital spending cycle on infrastructure construction over the last few years has created a backdrop or a framework that is now allowing the deleveraged private sector to take over the investment cycle, if you use the analogy of a relay race, and this is now clearly happening and it is extremely positive. The last time we had a private sector investment cycle in India was between 2002 and 2009. The Indian stock market has outperformed spectacularly in an Asian context and has done so so far, again, this time. And obviously, that private sector investment cycle is coming on the back of a four-year upswing in the residential real estate cycle, which we also believe will continue.

Two and a half years ago, when we interacted with you, the interview was conducted in a different setting. It was the ET Now office and you were one of the first to make a clear, strong and compelling buy call on consumer technology companies like Zomato. And from Rs 50, Zomato It has gone up to Rs 300. Other consumer tech and fintech stocks have also gone up again. Where do you think that group is headed in India, consumer tech, fintech, this whole tech-driven set, so to speak?
Chris Madera: Now, that whole area still has a very interesting dynamic. Obviously, the key question in that area is the bottom-up question of who is going to prevail. But that area as a whole is not going away. It’s a question of winners and losers, because in that particular area there is a tendency towards a winner-take-all dynamic.

You have always been a big fan of Indian finance, and especially of private banks. Now that the rate cut is coming and will have an effect on liquidity, do you think there are compelling reasons for this? private banks In India to overcome?
Chris Madera: Well, for me, private banks or even IT services companies are the low beta areas of the portfolio. So, in a world where there is a correction, these sectors will, in my opinion, outperform. But I think the drivers of this current bull market that we have been in have been more in the energy, infrastructure and real estate area and I guess these remain the key drivers of the story.

But it is clear that banks should have already performed better. Banks have also had to face a regulatory hurdle, with the Reserve Bank of India taking a rather preemptive stance on regulatory initiatives in recent months, which in the short term is negative for banks, but in the long term should be positive, because it means that the credit cycle should continue for longer without interruptions.

So, I hold banks in my long-term investment portfolio in India, out of greed and fear, but I also hold the higher beta areas like capex, real estate and energy.

You have been denouncing the confinement in the real estate cycle You have been arguing for some time now that the real estate cycle in India will continue to trend upwards. What makes you so convinced that the real estate cycle in India is trending upwards, given that average real estate prices in India have risen by 50-70% over the last three years?
Chris Madera: Well, we’re probably due for a pause to refresh the housing cycle, but overall, we’ve entered the fourth year of recovery after a seven-year recession, and during that recession, real estate prices increased less than income growth. So, my view is that there’s a huge pent-up demand for improvements.

I think inventory in all seven major cities is at its lowest level in several years. So, what should happen is that the real estate recovery will gradually broaden in terms of it being led by the high-end segment, which is what normally happens in a real estate cycle, that the high-end segment leads the recovery and hopefully, we should have some rate cuts in India in the next 12 months and that will make properties more affordable at lower price levels, like below the equivalent of $200,000 per unit.

I have heard that 500,000 properties are expected to be sold across the seven major cities this year. Basically, the number of properties being bought in India is still very low, compared to what we have seen in China at its peak.

At this point, I think we should expect the housing cycle to last another four years. We’ve just entered the fourth year of this recovery. I don’t see any reason why it should end suddenly.

Let me step back a bit and come back to world events. The next event on the calendar, which in some sense could have an impact on financial markets, is the US election. It will be Trump versus Kamala Harris. What do you think is in store for us? And what do you think Wall Street will like? And what do you think Wall Street will not like depending on the outcome of the US election?
Chris Madera: I think the most important factor in the upcoming presidential election is that there is a decisive winner. I think that is what the market wants most. The worst thing for the market would be a controversial election result, so that would be my first opinion. At the moment, the polls are still quite close, but they are in favour of Kamala Harris. From the stock market point of view, a Donald Trump victory would be riskier because he is going to be very pro-deregulation.

He’s going to want to extend tax cuts and he’s going to want to increase energy production, which could lead to a weaker oil price. So, he’s going to be more willing to take risks, whereas I think Kamala Harris would be more supportive of the status quo. Probably the biggest difference between the two candidates on domestic policy would be in the area of ​​energy. But I think the key point for the market is that there is a decisive outcome.

In your current model portfolio, your India weighting is 20%, which is within and around the benchmark. Now, you like India and there is a reason why Indian stocks or the Indian economy should be at a premium. But is there any specific reason why your recommended exposure to India is within and around the benchmark or slightly overweight?
Chris Madera: Yes, in my relative performance portfolio, where I manage the portfolio on a short-term tactical basis relative to the benchmark, I am managing India slightly above neutral and the main reason for that is that India’s neutral rating has risen sharply, which is also the reason why we believe that global emerging market investors are now slightly underweight India. But in my long-term or more long-term oriented global portfolios, I have much higher weightings in India. So, in my long-only Asia ex-Japan portfolio, which consists of about 25 concentrated stocks, I am still invested almost 50% in India. So, this neutral weighting is just a tactical decision, given that we have very high valuations and it would not be surprising to see more of a correction of the kind that you were discussing in state-owned company stocks with Mahesh. However, the key point is that if there is a correction, foreigners will see it as a buying opportunity because, as we have said, they are underweight.

What is Chris Wood’s market view: short term, medium term and long term?
Chris Madera: Five and ten years down the road, I still believe that India is the best equity opportunity in the world. In a short-term perspective, India is not going to be the focus in the short term because we have entered into a Fed easing cycle and other emerging markets like Brazil are a good example as they are more geared towards falling US rates.

Now, let’s identify the trades based on the time horizon. Which trade are you optimistic about, tactically speaking, in the short term? In the short term, when I say six months? Which trade are you optimistic about in the medium term, i.e. one to three years? And which investment are you optimistic about, i.e. in the long term, three years or more?
Chris Madera: In six months, I would be buying gold mining stocks. Gold is up a lot. Energy is at the lower end of the range. Gold mining company profit margins should increase significantly. And so far, gold mining company stocks have underperformed gold bullion.

And in the medium and long term too.
Chris Madera: My long-term recommendation to anyone listening would be to sell US Treasuries.