Chasing bets, dodging risks: Why Chris Wood of Jefferies is bargain hunting in India with a cautionary eye

The big question on his mind: Will domestic institutional investors (DIIs) keep buying? “Based on my discussions with mutual fund companies last week, they don’t see those signs (of redemption) yet, as I asked them directly,” he told Mint.

Drawing from his latest ‘Greed and Fear’ report and conversations in Mumbai last week, Wood noted that there is confidence that these inflows will continue. However, he cautioned, “The real risk will arise if and when investors begin to see year-on-year losses in their portfolios.”

Broadly speaking, he believes the risk of further corrections persists. While India has already experienced a substantial correction that contributed to the slowdown, he sees the bigger threat now looming from external forces—particularly the US.

Another critical variable? The dollar. He expects a peaking out in the dollar. The peaking of the dollar will give more room for the RBI to ease, which it has already started doing, he says. “But if I am wrong on the dollar, it’s going to be more negative not just for Indian equities but for all emerging markets.”

On the India vs China debate, Wood highlighted a clear trend: investors have been steadily reducing their exposure to India over the past few months while increasing allocations to China. “I have been adding to China since then and increased my allocation further after the DeepSeek news. But overall, this foreign selling in India is clearly a rotation into China,” he said. Edited excerpts of the interview:

Your latest Greed and Fear report suggests that you are not concerned about a structural slowdown in the market and the economy. What is your perspective on India Inc.’s weak corporate earnings?

Yes, there has been a cyclical slowdown, but a structural slowdown may not be a major concern. One of the key reasons for the slowdown in the last quarter, as well as the current one, is the tightening of monetary and credit policies implemented last year. This led to a significant deceleration in loan growth due to the Reserve Bank of India’s (RBI) credit tightening measures.

Additionally, the RBI conveyed a strong message regarding microlending, which also had an impact. While this has contributed to the cyclical slowdown, it is important to note that the RBI has now signalled the easing of its policies.

Regarding corporate earnings, he believes the slowdown in earnings growth this quarter is less severe as compared to the previous quarter.

Investing in India can sometimes feel like navigating uncharted waters, especially with Sebi being more proactive. What’s the one red flag that gives you a pause while investing in India?

Investing in India today is relatively cheaper than it was four months ago. Even as the Indian market in the recent months has seen significant FII selling, a key characteristic is the resilience of inflows in the mutual funds. So, one question in coming months, is will those inflows continue?

Do you think there is a threat to these inflows?

It is surprising how resilient the inflows have been so far. However, these are monthly instalments. As I mentioned in the latest Greed and Fear report and my discussions in Mumbai last week, there is confidence that these inflows will continue. The real risk will arise if and when investors begin to see year-on-year losses in their portfolios.

You said the Indian market has now started to correct properly. Does that mean investors should start dipping their toes in Indian equities from here on?

It all depends on how they are positioned. If someone doesn’t own any Indian equities, I’d definitely say they should start investing. But if they already have 90% of their allocation in Indian equities, then I’d say no.

The real risk arises if investors see year-on-year losses in their portfolios.

Do you see more corrections ahead for Indian equities?

The risk of a further correction continues because one reason is that the US equity market is starting to correct, and if that continues, there’s a bigger risk of the correction dragging on due to the external environment. I think in domestic terms, India has already had a more than healthy correction, which factors in the slowdown. So, from here, the bigger risk comes from the external side, particularly the US.

Another key variable is the dollar. I’m expecting a peaking out in the dollar, and the peaking of the dollar will give more room for the RBI to ease, which it has already started doing. “But if I am wrong on the dollar, it’s going to be more negative not just for Indian equities but for all emerging markets. So, the dollar is a key factor for all EMs, including India.”

How do you anticipate the dollar’s movement under Trump’s regime now?

My base case is that what happened last time when Donald Trump was elected will happen again. The dollar rises when he is elected but peaks once he becomes president. Also, Donald Trump does not want a strong dollar.

Which sectors do you think are most vulnerable to a downturn?

I think there’s already been a significant correction in the vulnerable sectors. The high-beta sectors have corrected. What Indian investors seem to be doing is shifting out of domestic cyclicals like capex and property—sectors that outperformed last year—and are instead focusing on discretionary consumer stocks. That is partly due to a slowdown in the government capex and partly due to the tax cuts in the budget.

Which sectors do you think will drive a recovery going ahead?

In the short term, I think people will be looking at the domestic consumer sectors for growth. Another area that has been benefitting is NBFCs (non-banking financial companies) because the RBI has relaxed some of the regulations.

How does China look in comparison to India in terms of investment among EMs?

Foreign investors are selling India because they need to allocate more funds to China. What has happened is that, investors have been gradually reducing their exposure to India over the past few months and increasing their positions in China. This shift is driven by growing confidence as the Chinese stock market appears to have bottomed out. I have been adding to China since then and increased my allocation further after the DeepSeek news. But overall, this foreign selling in India clearly rotates into China.

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Do you find any other emerging markets attractive?

A major emerging market that is the cheapest and looks appealing is Brazil. So, from a one-to-two-year point of view, Brazil looks very attractive.

What would it take for the FIIs to come back to India?

Midcap valuations converging with blue-chip valuations would be a catalyst for FIIs to return.

There is a clear dichotomy—FIIs are selling due to valuation concerns, while DIIs are confidently buying Indian equities despite them. You’ve interacted with many investors—what’s driving their confidence in India?

Right now, I’m speaking with domestic mutual funds, and they’re simply investing the inflows into their funds, which primarily come from monthly SIPs.

Given the significant correction, especially in midcap stocks, the flows from domestic investors have remained remarkably resilient. However, the risk is that if the market doesn’t recover in three months, investors may start seeing year-on-year losses in their portfolios.

The small-cap index has already entered bear territory, and a market segment anticipates potential redemptions ahead. Some portfolio managers have a cash holding of as high as 90%—what do you make of it?

That’s actually huge, and it means the market could see a big rally at any moment.

Do you think we could see redemptions in the Indian market going forward?

Well, that’s the risk, but what’s amazing is how resilient the Indian investor has been.

What do you think could be the earliest signs of redemption if it were to happen?

Based on my discussions with mutual fund companies last week, they don’t see those signs yet, as I asked them directly. As I said, the biggest risk of redemption pressure arises when ordinary investors’ SIP accounts start showing year-on-year declines, which I believe is more likely in about three months.

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