Taper tantrum: Indian stock market likely to underperform, says Chris Wood

File photo of Christopher Wood, global head of equity strategy at Jefferies
Indian stock markets are likely to underperform their global peers in case of a global risk-off triggered by a taper scare, believes Christopher Wood, global head of equity strategy at Jefferies. Yet, he remains structurally positive and has hiked allocation to Indian equities by two percentage points (2 ppt). 

Currently, 31 per cent of Wood's Asia ex-Japan thematic equity portfolio for long-only absolute-return investors is in India and includes marquee names such as Reliance Industries (RIL), HDFC, ICICI Prudential Life Insurance, ICICI Lombard General Insurance, Godrej Properties and ICICI Bank.

“GREED & fear remains structurally positive on the Indian market despite the lofty valuation at 21.5 times 12-month forward earnings, which creates a certain vertigo,” Wood wrote in his weekly note to investors, GREED & fear.

In July, Wood had launched an India long-only equity portfolio with 16 stocks, which included ICICI Bank, HDFC, Bajaj Finance, RIL, ONGC, Maruti Suzuki India, Tata Steel, and Jubilant FoodWorks.

The major risk to Indian equities, according to him, is the arrival of a new Covid variant, which he says the country shares with the rest of the world. The other risk, according him, is a change in Reserve Bank of India's (RBI's) dovish policy.

“To signal the continuing structural bullish view on India, GREED & fear will increase the weighting this week by two percentage points with the money shaved from China and Hong Kong. If India corrects more sharply in an aggravated tapering scare, the weighting will be added to. Meanwhile, China would be a natural outperformer in a tapering scare were it not for the continuing regulatory noise,” Wood said.

Global financial markets have been rattled over the past few days on the back of recently released minutes of the Federal Open Market Committee (FOMC) meeting that indicated an earlier-than-expected tapering of its $120 billion a month bond buying program. From a market standpoint, a sooner-than-expected taper could cause some jitters in the risk on trade in equities, Wood believes, and can give a reason for Treasury bond yields to move higher.

Indian basket

“It does appear that the divergence of opinions about the start of tapering has prevented the FOMC participants from talking much about the advance notice. This suggests that Jackson Hole meeting may be too soon for this and that the September FOMC meeting is more likely to deliver this early warning signal,” said Philip Marey, senior US strategist at Rabobank International.

An August global fund manager survey by BofA Securities suggests that 84 per cent of fund managers expect the US Fed to signal taper by the year-end. Allocation to emerging market equities by leading global fund managers, according to BofA Securities, slipped 11 per cent month-on-month to a net 3 per cent. 

“28 per cent of investors expect the Fed to signal tapering at Jackson Hole, 33 per cent of investors think September FOMC, while 23 per cent of investors think Q4-2021. The timing of the first-rate hike has been pushed back into 2023. Inflation, taper tantrum, Covid-19 delta variant, asset bubbles and China policy are the biggest tail risks to the markets,” the BofA Securities survey findings suggest.

Global allocation



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