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India today is the most dynamic capital market in the world, said Christopher Wood, global head of equity strategy at Jefferies.
Wood called Indian equities the “best long-term stock market story globally”, even as he warned of excesses in the US markets and risks from an unfolding artificial intelligence investment bubble.
While India remains an expensive market much like the US, valuations are now back to historical averages relative to other emerging markets. The real froth, he argued, lies in the mid-cap segment rather than in blue chips.
“The disappointment on the macro side is that we have seen less of a private sector capex cycle in this cycle than expected. Most of the capex in the last 10 years has been government-driven,” he said. However, with banks cleaned up and corporates deleveraged, Wood expects a more protracted and sustainable private investment cycle ahead.
On the policy front, he believes the Reserve Bank of India’s hawkish stance last year as “healthy” for the system. “Now, it has turned more dovish. With a weaker dollar, easier policy may not hurt equities too much,” Wood said.
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One of the strongest pillars for Indian markets, he said, is the domestic investment engine. Equity mutual funds continue to see strong inflows, largely through systematic investment plans, even during market corrections. “The ongoing boom in the domestic asset management industry and wealth management industry is a hugely successful story, and one I expect to continue,” Wood added. The surge of equity supply in recent months, with corporates and private equity firms rushing to raise capital at high valuations, has created temporary indigestion, but he sees this as a phase of “healthy consolidation.”Placing India in the global context, Wood highlighted the risks building in the US markets. Valuations are stretched, with the S&P 500 trading at record-high price-to-sales ratios, far above levels seen during the dot-com bubble or the 2008 financial crisis. The rally, he noted, has been narrowly driven by four hyperscalers and Nvidia, which together contributed nearly half of the S&P 500’s gains since early 2023.While AI is undoubtedly transformative, Wood linked the current surge in capex to the internet boom-and-bust of 1999-2002. “The amount of money being invested in AI is truly gobsmacking,” he said, projecting $350 billion of spending this year by just the four hyperscalers. This could lead to massive excess capacity in data centres, triggering another investment bust. In the longer run, however, AI technologies will become cheap to operate, leaving lasting benefits for the economy.
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