HONG KONG: Does Monday’s 367-point drop in the Sensex, which mirrors sharp falls across Asian stock markets, portend a “black October”?
Not in the opinion of Christopher Wood, Asian equity strategist at Hong Kong research and securities firm CLSA. “I don’t expect an October crash,” he said. But although in his estimation Asian stocks offered a long-term investment play, he cautioned that the Indian market, among other Asian markets, could see another correction close to year-end and retest the levels they plunged to in May. That correction, leading up to the fourth quarter, could come about as more evidence of a slowdown in US economic growth materialises, said Wood, on the sidelines of the 13th CLSA Investors’ Forum 2006 in Hong Kong.
And how does he read the Indian market? India, he said, was the most highly valued stock market in Asia as well as among global emerging markets, but its valuations could be accounted for by the prospect of its high-growth story and a higher return on equity.
“India’s been my favourite market in Asia since 2003, when it was trading well below current levels.” Since their sharp fall in May, noted Wood, Asian indices had “celebrated the end of the Fed interest rate tightening” and retraced much of their losses. So, would he invest in the Indian market today? “Tactically, I would not want to buy India with my own money today,” he said. “If you had nothing invested in India today, given the growth story there, it’s very risky not to invest anything. But if you’re already heavily invested… I wouldn’t be adding anything right now.”
Wood said he expected the Sensex to retest the 9,000 levels that had been tested in the earlier correction in May. Yet, in the long term, he added, “I expect the Sensex to improve… by the end of this long-term secular bull market.” India, he noted, had the “highest quality of companies” not only in Asia, but across the global emerging markets. And it appeared that inflationary pressures were under control.
Investors’ faith in the long-term Asian growth story was greater today than it was three years ago, Wood said. And one encouraging aspect of the market correction in May was that although hedge fund investors sold, there were few redemptions from long-term mutual fund managers.
Ironically, although the Indian economy was relatively better insulated from a US economic slowdown than, say, Malaysia (because India, unlike Malaysia, was not so highly geared towards external trade), it was more susceptible to a Wall Street downturn since its stock markets are flush with foreign institutional investments.
Of course, Wood conceded, a lot of these calculations could go out the window if it emerges that inflationary pressures persist in the US and the Fed isn’t quite done with monetary tightening.
“If I’m wrong on that, if there’s a surprise on the inflation story, and if bond markets freak out, we could be ripe for a real blow. In such a scenario, he reckoned, “the Sensex could even halve to about 6,000.” Now, that would be a black day…
