China is a better short-term bet than India, says Jefferies

China is a better short-term bet than India, says Jefferies

A shareholder watches the stock market in a securities business hall. Nanjing, Jiangsu Province, China, 6 July 2020.

Costfoto | Barcroft Media via Getty Images

China is a better short-term bet than India for investors who are looking at Asian markets excluding Japan, according to Christopher Wood, global head of equity strategy at Jefferies.

“Structurally, I am very bullish on India,” Wood said Wednesday. “It’s just commenced a residential property cycle that had been on a downturn for seven years.”

“But in the short-term, I would favor China over India because India’s going to be vulnerable to any Fed tightening, tapering scares,” he added on CNBC’s “Street Signs Asia.”

Why China?

It’s been a difficult year for investors exposed to the Chinese market, in part due to Beijing’s regulatory crackdown on the tech sector, particularly against internet companies. Policy tightening in the property market, aimed at curbing excesses, also took a toll on investor sentiment.

The MSCI China index, which foreign investors often use as a benchmark, is down about 20% year-to-date.

“In my view, the worst of the regulatory crackdown on internet [sector] is behind us,” Wood said. “The question is how the new rules are enforced and what’s the appropriate increase in risk premium.”

According to Wood, China tightened monetary policy for most part of the year, and it’s now past the peak of tightening. While it’s unlikely that there’s going to be a dramatic easing going forward, there will be incremental moves that would put China in a different direction from the Fed.

My ideal standpoint on China … is to own Chinese equities, but to hedge your equity positions by owning Chinese government bonds.

Christopher Wood

global head of equity strategy, Jefferies

“So that dynamic creates a more constructive backdrop for Chinese equities,” he added.

Analysts have previously said that China’s growth slowdown is likely to force the hand of policymakers to undertake incremental loosening across monetary, fiscal and regulatory policy.

“So, my ideal standpoint on China … is to own Chinese equities, but to hedge your equity positions by owning Chinese government bonds, which remains the most attractive government bond market in major markets,” Wood said.

The Chinese yuan is also expected to remain strong and any pullback is a “buying opportunity,” he added.

Risks for India

India’s stock market has been resilient this year despite economic setbacks due to the coronavirus pandemic. The NSE Nifty 50 index broke the 18,000 level in October and is up around 22% year-to-date while the benchmark S&P BSE Sensex is up about 20%.

Federal Reserve Chair Jerome Powell indicated this week that the U.S. central bank could step up efforts to more quickly reduce the pace of monthly bond purchases.

The Fed took unprecedented moves to ease policy when the coronavirus pandemic hit early last year. It cut interest rates to zero and instituted a $120 billion monthly bond-buying program to support financial markets and the U.S. economy.

Typically, when the Fed raises interest rates, investors reallocate capital away from emerging markets and put them in U.S. assets because they yield higher returns. That leads to a depreciation in emerging market currencies against the greenback and puts pressure on their dollar-denominated debt.

India’s economy is going to be “reasonably buffered” as long as the Fed does not move aggressively on policy, according to Jahangir Aziz, JPMorgan’s chief emerging markets economist.

“There is hardly any credit growth, consumption is not there, investment growth is lacking, current account deficit is very well contained,” Aziz said Wednesday on CNBC’s “Squawk Box Asia.” He added that the Reserve Bank of India is also sitting on a large amount of foreign exchange reserves.

As on Nov. 19, the RBI had $640 billion of foreign exchange reserves.

“Obviously, capital flows will have to respond to higher, or stronger global conditions, but I don’t really think that external vulnerability is something one should be concerned about India,” Aziz said.

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