Christopher Wood, global head of equity strategy at Jefferies has maintained a ‘reduced overweight’ rating on India in his ex-Japan portfolio for long-only investors. The rating comes after the presentation of the Union Budget on February 1, which according to him, lacked measures to prop-up the economy.
Despite the introduction of optional personal income-tax (I-T) structure that lowered rates and took away most exemptions and deductions that individual taxpayers could avail, including that for life insurance products, Wood remains bullish on the Indian insurance sector.
“Amidst the relative lack of urgency on economic policy, a cynic might wonder whether the Modi government might have decided to concentrate primarily on its social ‘majoritarian’ policy, which is popular with the Hindu majority. Hopefully, this is not the case though it is clearly a growing risk, most particularly given the lack of credible opposition to the BJP government at the national level. For now, GREED & fear maintains a reduced ‘overweight’ in India in the Asia Pacific ex-Japan relative-return portfolio,” Wood wrote in his weekly note to investors.
Calling the divestment target for financial year 2020-21 (FY21) ambitious, another negative in the Budget, Wood says, was the lack of detail on how to address the issue of 1,500 ‘stuck’ residential property projects. The proposals also did not help mortgage sector much, where there had been hopes of an increase in tax deductions, and also no help for the struggling auto sector where motor vehicle sales were down 14 per cent year-on-year in 2019. Increase in import tariffs on electronics, electric vehicles and other goods to combat ‘dumping’ and promote ‘Make in India’ also did not go down well with him.
“Indian insurance (sector) remains one of Asia’s better long-term growth stories. As for the budget itself, while the stated intention to remove all deductions in the long run is a positive in terms of a general principle, in this case the changes have only served to make the tax system more complicated, not less,” Wood wrote.
In September 2019, he had bought SBI Life Insurance and HDFC Life Insurance, which now account for 5 per cent and 4 per cent weight in the above-mentioned portfolio.
Bullish on fixed income segment
Meanwhile, Wood feels that the fixed income market remains the best way for equity portfolios to hedge the negative impact on growth of Wuhan Coronavirus. The rate of infections, he observes, has started to slow now with the cumulative number of infected cases in mainland China rising by only 15 per cent on Thursday, compared with a 51 per cent average daily growth in the five days to 27 January.
Though he believes that Coronavirus scare will just be a one-quarter affair, any rise in the infected cases can trigger a panic sell-off in Anglo-Saxon dominated financial markets, the driver of which would likely be the news-flow on inflections outside China, most particularly if the victims are not Chinese.
“If there is a continuing slowdown in infections, which is now a reasonable hope as China only started to adopt draconian measures such as shutting down entire cities two weeks ago, that should certainly become much clearer before the end of February given the assumed 14-day incubation period. Such a deceleration would immediately trigger further ‘risk-on’ sentiment given the backdrop of dovish investors. But if the infection rate is still growing at about 3,700 new cases daily, then real panic selling will start to hit markets,” Wood cautions.