India runs risk of sovereign debt crisis: Christopher Wood, Chief Equity Strategist, CLSA

The current woes of the Indian economy, he said were “self-inflicted due to 
continuing lack of investment cycle and deprecation of the currency against the dollar”.

By Biswajit Baruah, ET Bureau | 12 Sep, 2013, 07.10AM IST

MUMBAI: Chris Wood's view on India is sharply at odds with the current market cheer that's been engendered by the dramatic recovery in the rupee, the surge in stocks and an increasingly sunny outlook. CLSA's chief equity strategist is holding out against getting swayed by a change of sentiment that's just about a week old after all.

Still, some of his comments in an interview with ET seemed counter-intuitive. For instance, he declared that "India in the Asian markets remains most at risk of a sovereign debt crisis", but argued against the contention as well. "This is despite the fact that India does not have a debt market reliant on foreign capital, given the lack of foreign ownership of rupee debt. The foreign ownership of Indian government securities was only 1.61 per cent at the end of March, though it is up from 0.88 per cent at the end of March 2012. In this sense, India is not directly correlated into emerging market debt dynamics."

The best hope for the Indian stock markets would be a worsening of the country's economic crisis, he argued. Why? Because that will improve the chances of Gujarat Chief MinisterNarendra Modi emerging as BJP's prime ministerial candidate, according to Wood. As for the current woes of the Indian economy, he said they were "self-inflicted due to continuing lack of investment cycle and deprecation of the currency against the dollar".

He's not surprised by the resilience of the Indian equity markets because foreign funds are "crowded into quality, albeit expensive stocks that have outperformed".

 Foreign institutional investors (FIIs) have bought stocks worth more than $875 million over the past five trading sessions through Wednesday, after having been net sellers to the tune of $4 billion between June and August.

FIIs have so far invested $138 billion into Indian equities, and foreign ownership in them is estimated at around 22 per cent. Continuing with his theme of gloom despite the current positive sentiment, Wood said India was staring at a sovereign downgrade as economic fundamentals continue to worsen and the rupee is losing its stability. But any move to approach the International Monetary Fund (IMF) for assistance would be political suicide for the current Congress-led UPA government, he said.

Following the passage of the Food Security Bill, concerns over the fiscal situation have become more acute, renewing doubts about the government's ability to control spending ahead of elections due next year. "In this respect, it hardly inspires confidence that Congress leader, Italy-born Sonia Gandhi, appeared in Parliament recently talking up her expensive Food Security Bill," Wood said.

Emerging markets, including those in Asia, will remain vulnerable to further selling pressure, as long as markets continue to anticipate the normalisation of US monetary policy, and related strengthening of the dollar, Wood said.

Wood also drew attention to the prospect of the bad debt burden of state-owned Indian banks rising further, given higher interest rates and the slump persisting.

"Despite the temptation to buy cheap (state-run) banks on a contrarian basis, we will stick with the expensive quality private sector banks geared to the consumer space, since it is far from evident that India has passed the worst," he said.

 "It is also the case that the credit problems are primarily in the corporate and infrastructure-related sectors."