The ongoing rally in the US is a bear market rally and the Indian market is just following its Us counterpart, Christopher Wood, global head of equity strategy at Jefferies told in an interview with the Economic Times (ET).
"My view is that it is a bear market rally in the US. The reason to be sceptical about the rally in America is that you have a double whammy - tightening of higher rates and shrinking balance sheets - which is negative for liquidity. The rally is driven by hopes that inflation pressures have peaked. Inflation may have peaked but the key issue is whether inflation has settled," Wood said.
The real issue is whether the Fed is going to try and meet its 2% target. India is just following the US. I am suspicious of this rally in the US and India. The market rally in India is closely connected to the rally on Wall Street. The key issue here in India is how much rates go up and how far the rupee declines," he added.
Wood said that the inflation issue in America or Europe is much bigger than in India. However, he added that India’s inflation issue is more severe than in China or Indonesia which is why India's currency has been weaker.
Talking about the return of foreign capital to the Indian market, Wood said that the foreign portfolio investors (FPIs) have not bought that much compared to what they sold.
He said one of the biggest reasons why FPIs had been selling in the Indian market was because they were putting money into China as it was looking attractive due to easing policy while India was tightening.
However now, since China's macroeconomic indicators are showing signs of deep stress due to the Covid suppression policy, FPIs have started to come back to India slowly.
Wood said India is not the best market this year because of monetary tightening. However, in the long term, India remains one of the brightest investing destinations.
"This year India is not the best market, because of the monetary tightening cycle. The best performing market, when I last checked, in Asia was Indonesia. My biggest overweight in Asia this calendar year so far has been Indonesia. India is fine, but India has got a lot of crosscurrents. On a 10-year view, India is my favourite bet but not in 2022," Wood told ET.
"The interesting point about India this year is the resilience of the stock market given a large amount of foreign selling. In the long term, one should remain invested in India but definitely, the risk of a correction is rising. What the RBI does is important," he said.
Disclaimer: This article is based on an ET interview. The views expressed here are those of the analyst and not of MintGenie.