Christopher Wood, global head of equity strategy at Jefferies
For equity portfolios to beat inflation
blues, investors should adopt a strategy of owning both growth and value stocks, suggests Christopher Wood, global head of equity strategy at Jefferies. Global fund managers, he says, should keep an eye on the five-year forward inflation
expectation rate in the US to get a sense of the timing of taper by the US Fed.
In the Indian context, Wood has picked up a stake in Bajaj Finance in his Asia ex-Japan thematic equity portfolio for long-only absolute-return investors. In August, he had increased his exposure to Indian equities by 2 percentage points (ppt) in the above-mentioned portfolio.
“Continue to recommend for equity portfolios a barbell strategy of owing both growth and value. Ultimately, the relative merits of both will be determined by the outcome of the current debate on whether the pickup in inflation
is transitory or not. Still even if it is not transitory growth stocks
will not be as impacted as negatively as they might otherwise be, at least initially, if the Federal Reserve and other G7 central banks favour policies of financial repression over monetary tightening in line with GREED & fear’s base case,” Wood wrote in his weekly newsletter to investors, GREED & fear.
Typically, a growth stock is of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than the average company within the same industry. On the other hand, value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis.
At its Jackson Hole meeting recently, the Fed Chair Powell hinted at a taper in case the economic progress met the set targets. With the next meeting of the FOMC is on September 21-22, analysts say if the economy continues to evolve according to the Committee’s expectations, the US Fed is likely to give a more unconditional advance notice of the start of tapering.
“This could be followed by a formal announcement of the start of tapering at the subsequent meeting in early November. If the economy disappoints, or too many threaten to dissent in November, the FOMC can still make this announcement at the mid-December meeting,” says Philip Marey, senior US strategist at Rabobank International.
Indian stock markets, Wood believes, are likely to underperform their global peers in case of a global risk-off triggered by a taper scare. Analysts at Julius Baer also share a similar view and say that the investors could favour safe-haven plays as the US Fed inches closer to tapering its $120 billion a month liquidity program.
“We think there is a case of sector rotation to play out, which may invite some profit booking in the sectors that have been big outperformers recently. In the very near-term, the commentary by the US Fed and news
flow related to the third wave of the pandemic will remain a source of volatility and opportunity for the markets,” says Milind Muchhala, executive director at Julius Baer.
Meanwhile, an August global fund manager survey by BofA Securities suggested that 84 per cent of fund managers expect the US Fed to signal taper by the year-end. In this backdrop, allocation to emerging market equities by leading global fund managers, according to BofA Securities, slipped 11 per cent month-on-month to a net 3 per cent.
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