Christopher Wood, CLSA's chief equity strategist, in his widely followed newsletter `Greed and Fear' said that the firm has reduced its overweight on India in its Asia-Pacific ex-Japan relative-return portfolio to make way for a one percentage point increase in its weightage on Thailand.
Indian markets are currently at lifetime highs with the Nifty up 24.2 per cent and the Sensex up 21.8 per cent for the current year.
High valuations and a delay in earnings recovery in India have prompted global money managers to look at other markets which are cheaper. However, India remains one of the biggest overweight markets for emerging market equity funds.
Wood believes that the US Federal Reserve's move to start balance sheet reduction is a risk for asset markets as it is a form of monetary tightening.
Wood said that there has not been a fallout in markets due to the balance sheet reduction announcement as the Fed has begun tentatively by decreasing its reinvestment of maturing bonds and also because the G7 central banks are still expanding in aggregate.
Hong Kong-based Wood said the Fed's move to begin quantitative tightening is surprising given that inflation remains well below the US central bank's 2 per cent target.
Wood's base case is that the Fed will reverse its course sooner rather than later.
“The risks raised by the Fed's re newed attempt to normalise are that either economic conditions or market conditions, or a combination of both, may force it to reverse; and with such a reversal there is a much greater risk of a resulting loss of central bank credibility,“ said Wood.
Going forward, the issue of who will succeed Janet Yellen as the Fed chairperson will be critical, said Wood. For now, it is not clear if Yellen will be chosen to head the US central bank again when her term expires next year.
“If the Fed chairmanship is taken over by someone prioritising “normalisation“ over “data dependency“, and prioritising targets inflated asset prices over core CPI or PCE inflation, then the immediate consequences for asset markets will be much more negative given that the S&P 500 is trading 24 times GAAP-adjusted earnings and given that the macro trend in corporate earnings in America in recent years is much less healthy than
what is suggested by the performance of the American stock market,“ said CLSA.
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