Chris Wood on where there is greed in today’s market and where fear

“The biggest fear right now is the crypto space taking a serious body hit and there are huge legitimate concerns about other negative ripple effects, but personally I’m surprised Bitcoin hasn’t gone down The biggest greed is still in the private equity, private lending space,” says
Chris Woodglobal head of equity strategy,
Jefferies.

Exactly a year ago, the pattern in global financial markets was that interest rates would stay low, inflation was transient, and central banks would not interrupt their money printing cycle. Today, the fear is that interest rates will rise, inflation is tenacious and more than growth, we fear recession. So, a year from now, that is November 2023, what do you think the market narrative might be?
Well, the key point right now is that money supply growth would reach the US M2 level of 2020, which was the cause of the inflation we’ve seen over the past 18 months. I expected the surge in inflation because I saw the strong surge in M2 growth in the US, but for now the story has changed. As I wrote in my published Greed and Fear, US M2 growth is collapsing overnight. This collapse in US M2 growth has negative implications for the US economy and US asset prices next year, but it also creates the potential for a dramatic U-turn in Fed policy at some point. next year, where they will go from raising rates to lowering rates. So my base case is that the Fed will cut rates in 2023 and for me the question is whether that will happen in Q2 or Q3.

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In your mind, what exactly are the markets pricing on the geopolitical front 3-6 months from now? Do you think the markets are pricing in an end to the war? There could be a solution to what is happening between Russia and Ukraine. Is this a factor with which the markets work?
Markets cannot ignore geopolitical issues. Monetary tightening expectations have peaked and, for me, the big risk to my base case scenario is escalation in Ukraine. But if that is the risk, the biggest possibility is a sudden resolution to the Ukraine dispute which would then lead to a rally risk and oil, quickly correcting to $70.

So, as winter sets in in Europe and some of the costs of this European policy towards Ukraine are felt, some argue that an attempt should be made to resolve the Ukrainian conflict.

Earlier in the year, you thought growth stocks would peak and value stocks would come back. I guess it went wonderfully well. If you think interest rates have peaked and bond yields have peaked, do you think that somewhere in 2023 growth stocks will start to make a comeback?
They will, but the key question is will the Fed stick with its tough monetary tightening until inflation actually hits 2%? In this case, equities will come under much more downside pressure and you are better off holding government bonds. But in a world that is my base case, where the Fed forgets about its 2% target and starts to pull back long before we hit 2%, is a world where government bond investors suddenly realize that the Fed can tolerate a higher level of inflation and it is a world where equities are becoming more attractive than bonds.

In my second base case, you need to own both cyclical stocks and growth stocks.

Could there be a potential comeback in commodities, either because of China or because of the spike in interest rates, somewhere in 2023 could there be a reflation in commodity trading?
There will be two countervailing forces for commodities. The negative is clearly the risk of demand destruction in the event of a recession in the United States and Europe. This is a real risk, but on the positive side there is hope for a full opening of the Chinese economy. So by the second quarter of next year, even if Covid cases increase over the winter, the benefit of that will be there will be greater immunity, vaccination rates will increase over time and by the second quarter of next year, China really should be we’re looking at opening up on a larger scale, although we can also get China to open up earlier and in a more real way.

At the same time, fears of recession are intensifying in the West. So we have the positive and the negative for raw materials. It’s not that simple, but in the case of oil, we have structural underinvestment in oil because of the lack of investment resulting from the political attack on fossil fuels in the developed world, which has created structural shortage. Thus, oil may be more resilient in a downturn than in previous economic cycles.

Over the next six months, which asset class do you think may underperform and which will outperform? What would you advise people to hold onto for the next three years if they are considering a structural bet and five years beyond, what would you say everyone should have in their portfolio?
On a 3-6 month basis, the risk reward is likely favoring the buying of some Chinese stocks simply because there could be a full open by the second quarter of next year. But we have to understand that this is not happening fully right now. But Chinese stocks are cheap.

I also like Japanese stocks. I think Japanese and Chinese equities are attractive right now. Over a six month period, if you believe I rigged the 2% target story, which will be extremely sensitive to any hint that the Fed won’t stop unless inflation does reaches 2%, is an area where gold and silver will gain ground. On a five-year view, I stay with the Indian equity story.

Right now, where do you think there is greed in the market and where do you think there is currently excessive fear or skepticism in the world?
The biggest fear right now is with the crypto space seeing some serious body hits and there are huge legitimate concerns about other negative ripple effects, but personally I’m surprised Bitcoin hasn’t gone down more considering what happened because there were some pretty shocking developments. The biggest greed is probably still in the private equity, private lending space, because that’s the area that’s been the least impacted by what’s happened in terms of monetary tightening.