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Christopher Wood: Correction risk in short term, but Sensex could hit 100,000 in 5 years: Chris Wood

Christopher Wood, global head of equity strategy at Jefferies, said the Sensex is headed towards the 100,000 level in five years. In an interview, Hong Kong-based Wood said there is a risk of correction in the short term but he would buy on any correction as India is seeing signs of a cyclical rebound. He also warned that in the event of a global correction, the small-cap space will be a bigger casualty in the Indian market. Edited excerpts:

What is your assessment of Indian markets given the global risks such as Evergrande and a hawkish Fed?

Valuations are very high, but it looks like the economy is reaching an inflection point in earnings. From a long-term point of view, I remain constructive. In the short term, there is clearly a risk of a correction. India is expensive compared to historical levels and on a relative basis, but we have also seen continuing evidence of a cyclical rebound. I would be looking to buy any significant correction in India. I remain overweight on India. If there is a generalised stock market correction globally, I would expect India to underperform in the correction because it has gone up more than I would add to weightings.

I’m not that dramatically overweight right now but I would not be buying the Indian stock market today with borrowed money. If you have leverage and you are in Indian stocks, that’s risky at this point. On a six-month view, the risk is that the Reserve Bank of India starts to tighten monetary policy in the first-half of next year. It will be very gradual.

Where do you see the Sensex in five years?

That is a landmark level. You have got all these new companies being listed and it comes down to the composition of the index. If it’s 60,000 now, it can definitely be at 100,000 within five years. The bull run in India can go a lot longer because the real estate and property markets have just started to pick up.

Small- and mid-caps are holding up well. Is this space overheated?

That’s the area where we will see the big correction. If there is a global correction, the big correction in India will be in the small caps and in the IPO market.

Do you see the China Evergrande crisis having a contagion impact?
I don’t think Evergrande is a systemic crisis. Evergrande has been induced by the Chinese regulators because they were concerned that the company had too much debt. In August 2020, they came up with the three red lines policy. Some of the biggest and most leveraged property developers in China were told they had to meet specific financial ratios or they would no longer be funded by the banking system. This is not a spontaneous collapse. It is not systemic. This is the opposite of a Lehman moment. The Lehman collapse was a spontaneous collapse for which the US regulators were totally unprepared. This is a collapse induced by the Chinese government, which the Chinese authorities are fully prepared for.

How are emerging markets like India placed ahead of the likely beginning of Fed tapering?
That is a risk but the key issue is whether the Fed has underestimated the inflationary pressures. The key risk for Indian stocks in the next nine months is monetary tightening by the RBI, but the inflationary risks are greater in the US than in emerging markets. If the Fed suddenly decides that the pickup in inflationary pressures is more than transitory, we will have a big correction globally. For now, the Fed is still saying the inflation pick-up is transitory and so, the market is quite relaxed. The other risk to the Indian market is oil prices. The key issue is obviously the pandemic, but in a world that reopens more, the oil price will go much higher.

Your outlook on real estate stocks…
They are a long-term hold. They had a big rally recently. We are at the beginning of a new 5-7 year residential property cycle in India. The commercial property sector has been much more resilient in the last seven years than the residential property. The real opportunity is residential property because we are very early in a new upcycle.

You have raised stake in Bajaj Finance even as the stock has rallied sharply…
I already had that in my Indian portfolio. I just added it to my Asia ex-Japan long only portfolio. They’re about to kick off with an online business model. My biggest overweight in my long-only portfolio is not consumer lending. It is residential property. We saw a re-rating already, so if you don’t own them already, it is a bit late. This property cycle can run for a long time in India. Beyond the stock market, people who want a property should buy it now because prices will be going up.

Your take on the metal space in India?
One should buy on weakness. There’s still a structural story for the Indian steel makers. My core holding will remain real estate-related, housing finance-related, private sector banks and insurers. That’s my core holding in India, not commodities.

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