'If China did not exist, Sensex wouldn't have traded at this level'

Global investors are comfortable buying Indian equities at a high price because Chinese equities are priced even higher

by Nesil Staney – Mint

Christopher Wood, managing director and global equity strategist of investment research firm CLSA, expects the Indian economy to grow in the range of 8-10% at least for the next 10 years. Wood said that the Sensex, the benchmark index of the Bombay Stock Exchange (BSE), crossed 20,000 surprisingly fast. He added that the target of 40,000 that he had set for the index back in 2003 could be achieved quicker than what was initially expected.

However, according to Wood, the key to Indian equities is China. Global investors are comfortable buying Indian equities at a high price because Chinese equities are priced even higher. This benchmarking (against Chinese equity valuations) is driving up stock prices in India, Wood said in an interview with Mint. “The valuations in (the) Chinese equity market is forcing investors to re-rate other Asian markets, most importantly India. If China did not exist, the Sensex would not be trading as high as it is today.” Edited excerpts:

What is the short-term view on Indian markets? Will foreign investors continue to buy Indian equities at high prices?

The Sensex crossing 20,000 so early did surprise me. India is an expensive market at present. However, global investors are comfortable buying Indian equities at a high price because Chinese equities are priced much higher. The huge valuations in the Chinese market is forcing a re-rating of all other markets, most importantly India. The target of 40,000 can be achieved much faster. The question, (of) when, is heavily dependent on China. If China did not exist, the Sensex would not be trading at the current level; it could have grown slower. If China goes out of control, Indian market will also shoot up.

Is there a bubble forming in China similar to what happened in Japan in the late 80s?

The Chinese market is an excellent breeding ground for a monster asset bubble. Given the lack of alternative investment opportunities in the country, Chinese equities will continue to rise. If the Chinese authorities continue with incremental tightening, there could be a monster asset bubble in China in less than three years from now.

Do you expect India to tighten policies on capital inflows?

India’s central bank tightening capital inflows is the single largest risk on this market for a foreign investor. The rise in currency is posing a great challenge for the policy-makers. However, the rise in currency is one of the factors that attract foreign investors to India. I think there could be a 5% annualized return on Indian currency.

If the US Federal Reserve continues to cut interest rates, what would be the impact on Asian markets?

The US Fed will no doubt continue to cut interest rates, creating inflation in the country. There is no discipline in their policy. Asian currencies will continue to appreciate against the US dollar. Central banks across Asia will have to fight this. Also, what we are witnessing now is the last stage of the US paper dollar (Federal Reserve Note). It will soon be history. This is not just my opinion; it is the market reality.

What is the outlook on global commodities?

There could be a strong correction in all commodities as the US economy is on a recession. This correction could happen in a short-term. However, I am highly bullish on gold in the long term. In my estimate, gold prices could go up to $3,500 (Rs137,550) per ounce in the long term.

What do you find the most interesting sector in India?

The most attractive stocks are those related to infrastructure, simply because of macro-economic reasons. The huge expansion in India’s infrastructure space will benefit this sector, as seen in the case of other parts of the world. Also, the Indian central bank could cut interest rate sometime next year. A friendly tax cycle would push the fortunes of automobiles and other consumer products. On the other hand, sectors that have huge exposure to the US economy are best avoided.

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