Chris Wood On India’s Property Cycle, Capex And Risks Facing Stock Market

India's stock market has remained "extraordinarily resilient", Wood said.

Christopher Wood poses for a photograph after an interview at the 14th CLSA Japan Forum in Tokyo, Japan. (Photographer: Kiyoshi Ota/Bloomberg)
Christopher Wood poses for a photograph after an interview at the 14th CLSA Japan Forum in Tokyo, Japan. (Photographer: Kiyoshi Ota/Bloomberg)

As the crisis at China’s Evergrande Group deepens, Jefferies’ Chris Wood said it’s “easy to forget about India”.

India’s stock market has remained “extraordinarily resilient”, the market veteran said in his Greed & Fear report. “Jefferies India’s recovery tracker has risen from a low of 78% of the pre-Covid level in May to 108% in early September.” That, according to him, came as Covid-19 cases remain way off their high, while vaccination rate picked up.

Property Story

The structural bull story of the Indian markets, Wood said, remains in place with growing evidence that a new residential property cycle has commenced after a seven-year downturn despite the setback triggered by the delta Covid-19 wave.

“Pre-sales across the top seven cities rose 23% month-on-month and 41% year-on-year in July. Property registrations, indicating completed transactions, for July-September were up 45% in Mumbai and 56% in Delhi compared with the levels prevailing in 2019,” he said.

Also, unsold inventory is coming down sharply. “The inventory level in the National Capital Region, after stripping out stalled projects, has declined from a peak of 50 months of sales in October 2017 to 33 months.”

Affordability, according to him, too, remains at historically attractive levels. The housing affordability ratio, measured as home loan payment as a percentage of income, declined from 53% in FY12 to a record low of 27% in FY21, the report said. “This is clearly very different from, say, China.”

Greed & Fear has a 17% allocation to the property sector in the Indian long-only portfolio, while it “resists for now the temptation of putting any China developers into the China long-only portfolio”.

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Capex Cycle

Citing a separate Jefferies report, Wood highlighted that extending beyond the property sector, a broader-based private sector-driven capital spending cycle is only a year away. “This is interesting to Greed & Fear.”

The steel sector, he said, has started to see a pick-up in capex. “Combined capex plans of major steel companies rose from Rs 9,700 crore in FY21 to an estimated Rs 28,100 crore this fiscal,” Wood said. “In the previous capex cycle from 2004-2010, the housing upturn led the broader capex cycle by 12-18 months.”

Another positive, according to the report, is growing evidence of job creation. “The top-tier IT service companies hired a net 55,000 people in Q1 FY22 and are expected to hire a net 1.3-1.5 lakh this fiscal.”

The report also highlighted that hiring activities in India, as measured by the Naukri JobSpeak Index, rose 89% over the year earlier in August and is now up 24% compared with the pre-Covid level in August 2019.

Market Risks

Besides another Covid-19 wave, the major domestic risk to the stock market is a change in the Reserve Bank of India’s dovish policy, Wood said.

“The central bank has been raising its inflation forecast in recent meetings but has yet to signal a change in policy,” he said in the report. The RBI increased its CPI inflation forecast for this fiscal to 5.7% in its policy meeting on Aug. 4-6, up from 5.1% projected in June. “Still the RBI’s bond purchases under the open market operations programme have continued.”

The apex bank, according to Wood, is likely to start to slow its bond purchases before the end of the year, with the first rate hike probably coming in the first half of the next calendar year. “But any changes in policy should be very gradual. The easy money stance has clearly been one key driver of the stock market rally.”

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