Be greedy as well as fearful: Christopher Wood

In its weekly newsletter, GREED & fear the global head of equity strategy at Jefferies Christopher Wood suggest that investors should be greedy as well as fearful. Investors should adopt a strategy of owning both growth and value stocks. According to him, stocks markets have juice left. At the same time, he cautioned investors that the economic recovery could come at the cost of inflation.

In the Indian markets, Wood bought shares of Bajaj Finance in his Asia ex-Japan thematic equity portfolio for long-only absolute-return investors.

“A barbell strategy for equity portfolio owing both growth and value stocks. 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,” noted Wood in his this week’s newsletter, GREED & fear.

According to market pundits, a growth stock is typically one that comes with a substantially higher growth rate compared to the mean growth rate prevailing in the market. It means that the stock grows at a faster rate than the average stock in the market, consequently generating earnings at a faster rate.

On the other hand, Value stocks are the ones that are trading at relatively low multiples compared to their earnings and growth potential.

Talking about US Fed taper timing Wood mentioned that the five-year forward inflation expectation rate is the key variable for equity fund managers to monitor, in terms of the timing of a market-moving tapering scare, and for now it remains well below what GREED & fear regards as the 2.5% stress level. The five-year five-year forward inflation expectation rate has declined from a recent high of 2.38% in mid-May to a recent low of 2.06% in early July and is now 2.23%. And this evidently means that Fed would be in no hurry to raise interest rates.