Ahead of the US Federal Reserve’s policy outcome this week, market participants are anticipating another steep interest rate hike by the US central bank to curb rising inflation globally.
Chris Wood, global head of equity strategy at Jefferies, believes that this will be important and that there is a possibility of a year-end rally in the US if things go according to expectations that both inflation and the pace of Fed rate hikes may have already picked.
“There is a possibility of a rally into the year-end partly because the next Consumer Price Index (CPI) data point, which should come out just after the mid-term elections has a better base effect, first point. Second, if the mid-term congressional elections go in a way that the market perceives to be positive. I think both those events can trigger a bit of a rally into year end,” he said in an interview with CNBC-TV18.
Talking about India, Wood mentioned that the Indian stock market has shown phenomenal resilience amid global headwinds and a significant monetary tightening cycle by the central bank.
“What’s been amazing about India this year as a stock market is its phenomenal resilience in the face of a very weak Wall Street, record foreign selling of Indian equities in the first six months of the year, and a quite significant monetary tightening cycle by the Reserve Bank of India,” he said.
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“So to me, India is very well set up … the Indian stock market in the face of a very bearish global environment tells you how good the well-positioned interiors domestically,” he added.
According to Wood, there is a need to see major capitulation in the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks, but fundamentally, the best sector in the US has been energy.
“Fundamentally, the best sector to own last year and this year in America is energy, which remains my favourite sector to own stock-wise,” he mentioned.
On recession, Wood believes that the best lead indicator of recession risk in the US will be a collapse in broad money supply growth.
“The best lead indicator of the recession risk in the US, next year, is the collapse in broad money supply growth. In the last six months, the money supply has not grown at all in America. So yes, there is a chance for a rally if that CPI data point comes out lower,” he added.
Talking about emerging markets, Wood said global emerging market investors have to invest in China because it’s a major part of the benchmark, but he also anticipates that markets will increasingly see growing interest in global emerging market mandates excluding China.
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He also spoke about the US dollar where he mentioned that the currency rally is in its final stages and that the US could go into recession next year, which could be a risk to oil prices. Meanwhile, he expects markets to remain bullish on oil.
