With this the weight of Bajaj Finance now stands at 5 per cent. He also added 1 percentage point weight to Aea Limited, a tech conglomerate headquartered in Singapore. Simultaneously, he cut the weight of Taiwan’s MediaTek and Korea’s Samsung Electronics by 1 percentage point each.
With this change, Indian stocks have the largest 36 per cent weightage in the portfolio. This is more than the combined weight of China and Taiwan. Among other territories that are present in the portfolio are Korea, Australia, Hong Kong and Singapore.
Evergrande not Lehman moment
Wood argues that the Evergrande crisis in China is not the Lehman moment, but just an acute phase of the liquidity crisis that a real estate company is facing.
“This is not a spontaneous crisis. Rather Evergrande’s acute liquidity crisis, signalled by the 86 per cent collapse in its share price since late February, has been almost inevitable ever since China launched its ‘three red lines’ policy in August, 2020, asking selected property developers to conform to specific financial ratios,” Wood write in his weekly GREED & fear report.
Evergrande has total liabilities of $305 billion, which the company is finding it difficult to service. It has already defaulted on one interest payment, and is likely to default on another. Wood assumes the authorities are prepared to handle the fallout in what would amount to a controlled liquidation. However, why debt funds still own its papers surprises him.
“For such reasons, it is amazing that major debt funds still appear to own Evergrande paper, though that probably has something to do with the perverse logic of indexing. In the world of fixed income, the more debt an issuer has, the more likely it is to be included in an index,” he said.
Evergrande’s debt currently has a 1.5 per cent weighting in the Bloomberg Asia USD High-Yield Diversified Credit Index, with other Chinese developers accounting for 27.6 per cent of the index.
Indian real estate on a different path
While the Chinese real estate companies are falling out of favour, the story in India is entirely different. Investors’ growing realisation that Indian property is on the move is shown by Indian realty stocks hitting their highest level since 2010 this week.
“The structural bull story remains in place with growing evidence that a new residential property cycle has commenced after a seven-year downturn despite the setback triggered by the Delta wave,” said Wood.
He has allocated 17 per cent to the real estate sector in the Indian long-only portfolio.
The celebrated fund manager underlined that there are more tailwinds to India’s story. IT companies are hiring more and a broadbased private sector-driven capital spending cycle, extending beyond the property sector, is now thought to be only a year away.
“India also seems to be at a major inflection point in earnings with the corporate profits-to-GDP ratio bouncing off an all-time low of 1.2 per cent in FY20 to an estimated 2.1 per cent in FY21,” he said.