Indian stock markets could see a 25 per cent correction next year if the Narendra Modi-led Bharatiya Janata Party (BJP) does not return to power, Chris Wood, global head of equity strategy at Jefferies, said at the Business Standard BFSI Summit 2023.
“If there was a repeat of what happened with the surprise election in 2004, then I would expect a 25 per cent correction, if not more. But, the markets would bounce back sharply due to the momentum,” he said.
The Modi government, Wood added, has put through a lot of fundamental reforms which are hard to undo.
“Thus, I wouldn’t take a leveraged trade on India ahead of the upcoming general elections.”
That said, for Wood, India is the best domestic equity story among emerging markets (EMs).
“India is the best growth story among EMs, and particularly in Asia. This belief has been accentuated by the problems in China. Yet, this isn’t a global consensus view as global investors are barely invested in India,” Wood said.
Investors, he added, should remain structurally invested in India, where every dip should be bought into.
“The Indian markets will repeat the boom cycle we saw from 2002-2009, which will be driven by the housing boom, followed by private capex. The Indian property market has entered its third year of upturn after seven long years of downturn. And there are no signs of any downturn for now,” Wood added.
Wood expects the proportion of fixed capital formation as a percentage of gross domestic product (GDP) to rise in the coming years, driving growth.
On China’s slowdown
Wood said China is looking like Japan this year, where growth is slowing down. The key question, however, is whether this is a permanent turn or will China bounce back.
Despite this, Wood cautioned that foreign money was not flowing into as much as it should due to cumbersome processes for foreign institutional investors.
“A lot of money that was being invested in China has the potential of coming to India. This year, however, more global money has gone to Japan. All global funds are now looking into India but the issue is one has to apply for a FII status,” Wood said.
On Israel-Hamas war
Christopher Wood said the markets are not factoring in an escalation in the war, which can be seen from the bare movement in oil prices.
“I think the markets are assuming that the war won’t escalate into a broader Middle East war. Oil prices have barely risen; so clearly, any likely escalation has not been priced in,” he said.
On US markets
Wood said the US economy will enter a downturn next year as it is facing the impact of monetary tightening with a long lag.
If treasury bonds are selling off in the US, then they are no longer risk-free, he said.
Going ahead, the key trigger to watch out for is what will the US Fed do if the labour data weakens going ahead but inflation still remains high.
“The Fed will likely focus on keeping the workforce strong to support economic growth. Thus, inflation will remain in the 3-4 per cent range in the US, rather than the current mandate of 2 per cent, which will affect US bonds further,” Wood said.