For equity investors – be it the global developed market, the Indian market or emerging market equity – have we reached the point of maximum frustration?
I think the real financial stock market shake has been in the United States which makes sense because it is the United States where the dynamics of financial tightening is really starting and it is the United States that has the highest valuation especially in the whole technological space. Thus, we could not reach the relative maximum pessimism.
What is happening in the United States is rooted in the sale of perimeter. We’ve had huge sales in the biotech stocks in the crowded, thematic technology segment. What is happening now is that market leaders like FAANG are starting to show significant improvement and we will probably only be able to reach maximum sales when we get a lot more outflow from ETFs.
When did you say that we did not reach the level of maximum frustration? Which indicators are you using for benchmarking purposes – valuation, dollar index, flow, technology?
Since appraisals in the United States were so extreme, they could certainly get more appraisal contractions. Now I want to see if we get big outflows from ETFs per month but in the first three months of this year, there was no outflow from domestic US equity ETFs, those outflows really started in April.
So has the bear market started for global equity?
Whether you call it a beer market or a correction, it’s clearly going well, but S&P hasn’t dropped 20% from the top yet. I wouldn’t be surprised if it goes down 30% from the peak.
How different is the current market situation from what we saw in previous cycles in 2000, before the TMT stock recession and before the 2008 financial recession?
The big difference at the moment is being triggered by the tightening of the monetary environment in an environment where the Fed seems to be behind the curve and has failed to realize that there is going to be a big rise in inflation. In the spring of 2020 a huge amount of money was printed in America in response to the epidemic.
Thus the inflation we saw last year in the US and other G7 countries is the result of our printing in 2020.
If we have to crystallize, how can inflation go down to 6% in the near term? Is US inflation almost at an all-time high?
It may be but the real problem is where it is fixed. So yes, there is a good chance, inflation could be statistically highest and it would be a clear story if we did not have this Ukraine conflict. Before the start of the conflict in Ukraine, it was very clear that inflation was likely to reach its highest level since the March data points announced in April. But for now it is much less clear and the final issue of how much inflation will come down or not will depend on how strict the Fed is.
Do you think the Fed will be over tight?
Tight on from what perspective?
Although they may be ahead of the curve which is you start with 25 bps, you have done 50 bps and another 50 bps is coming. But can they do 75 instead of 50?
No, I don’t think they will 75 but the key is how long will it last? The most important issue for the financial markets this year is whether the Fed will implement another U-turn even though its language has changed significantly throughout the year.
So how should investors protect their portfolios in such an environment because almost every asset class has a risk? Bond formation is a weak investment but equity is being sold. Bitcoin is being sold. Just about everything is going through a process of risk adjustment?
Yes, but sector core value equities have surpassed significantly over the years. Anyone who has invested in stocks of a cyclical value will certainly defend themselves but the funny thing this year is that the price of government bonds is falling at the same time as stocks and this is a different development and that means there is a positive relationship between equity and the negative side of bonds.
This means that people are bonded as a diversifier away from equity risk, they are particularly disappointed in the developed world and what my favorite sector meant last year was energy stocks.
Do you think this transition from growth to price or from growth to cyclical is a perennial transition and could be a decade-long trend?
This will be a multi-year change if the Fed does not break behind inflation so that it will depend on how horrible the Fed actually is. The Fed is talking very harshly, the degree to which the Fed is talking is really tough and we have a really significant balance sheet contraction. The Fed can certainly break behind inflation but my personal base case is that at any time, the Fed will really go back before inflation breaks.
If central banks are currently trying to break behind inflation and inflation is suddenly the number one enemy of the people, is this the right time to invest in energy and commodities?
The reason for investing in energy stocks is that you have a hedge in the rest of your portfolio because there is a significant risk if oil is $ 150 or more so I was concerned. I thought Ukraine could get তেল 150 oil before the conflict breakout.
Chris Wood has a reputation for loving India and over the years you have shown it with your thoughts, your research papers and your newsletter. But surprisingly, your current India holding is a light over. In the past, you carried out model portfolio recommendations where India was significantly overweight. Why is that?
A, because in the short term, the RBI has started a tough cycle and my guess is that there could be two more rate hikes in the next two meetings. I am concerned about the high price of oil. So I was amazed at how resilient the Indian market has become this year with so much foreign sales. However it has been exploited by a very impressive internal flow but strategically, in the short term, we are still at risk of collapse in India. So my base case would be to increase the Indian allocation materially if we get further corrections.
Can you define the correction for us, 5%, 10% …?
People here seem to see the Nifty more than the Sensex, so, if we rise to 14,500 in the Nifty, I must add Indian weight because we have got strategic risk short term, financial austerity, oil price and food inflation. Ukraine is agitated by the situation.
But in the bigger picture, the good news in India is that we have finally seen evidence of the launch of the residential property cycle last year after a seven-year recession. This is very important because it is the supplier for the whole economy and my base case is that the residential cycle can last as long as the last down cycle lasted for seven years and it was time to create a positive employment.
I still think that once we get out of these different push systems, we can move into a larger capex cycle and I see India as a similar macroeconomic situation where we were in 2003, the last time India entered the residential property cycle.
I definitely remember the 2003 reports. You mentioned why Indian real estate stocks would do well and I am not surprised that your current long is in the sole portfolio, and.
Yes, but I may have other names. I run it as a structural portfolio. Tactically, if I run the portfolio for three months, they will look a little different.
And how different will that three month portfolio be?
W.It will be more defensive.
When you say defensive, consumer IT, pharma combination…?
In the short term, one will not have rate sensitive stocks because the RBI is raising rates but the financial tightening cycle in India is nothing like what you are likely to see in America.