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“The proposals reflect an obsession with costs. The aim is to reduce the total expense ratio charged by mutual funds by 15-20 basis points. Given that investors have the opportunity to invest directly in mutual funds and also in ETFs, Greed & Fear does not understand why pricing cannot be left to market forces,” he said.
On the Indian markets, Wood said banks and finance companies account for 36% of the Nifty Index, compared with only 24% for the MSCI India Index since HDFC Bank was excluded. Accordingly, Wood has added AU Small Finance Bank with a 3% weighting in his long-only portfolio.
According to him, inflation in Asia is likely to end up structurally lower in the region, relative to the US, than was the case prior to the pandemic, reflecting an entirely different policy responses to Covid compared with the G7 world. The widespread assumption in the Indian market is that domestic inflation pressures have peaked and the next move will be a rate cut. The RBI will manage monetary policy primarily around domestic factors and may resist the pressure to raise rates, said Wood. With a growing amount of imported oil being purchased with rupees, foreign exchange reserves are not being used up to the extent like in the past, he said. And WPI inflation has turned negative for the first time since July 2020.“The difference between US and India inflation has been running of late at a historically low level. Yet India was the Asian economy with the biggest inflation issue at the start of last year which is why the RBI was slightly behind the curve in the first half of 2022 in terms of combating inflation. This is no longer the case after the 290 basis points of RBI tightening,” said Wood. He said structurally-lower inflation in Asia should also mean a lower cost of capital going forward for the likes of India and Indonesia. All this is the consequence of pursuing more orthodox fiscal and monetary policy than their G7 counterparts in the post-2008 era.
The forthcoming May employment data due to be released on June 2 and May CPI data on June 13 will be very important in determining whether the Fed raises rates again at the FOMC meeting on June 13-14. This will raise issues for Asian central banks if the Fed tightens again, Wood said.“The Fed funds futures market is now discounting an 80% chance of a 25bp rate hike by July. It also expects only a 63% chance of a rate cut this year, compared with 75bp of rate cuts expected as recently as mid-May,” he said.
The AI narrative has given tech investors a new concept to believe in again, as reflected most dramatically in the market’s exuberant response to Nvidia’s earnings report last week. This has raised the potential for renewed US outperformance, given that the American stock market is more geared to AI than other equity asset classes, including emerging markets, said Wood.However, he cautioned against ignoring the damage being done by the ongoing monetary tightening cycle in the US and that interest rates remaining higher for longer would only be bad news for the credit asset class.
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