Stocks to rise, bonds to fall till Fed reacts: Wood

The biggest risk for India is the rising coronavirus cases, said Christopher Wood, chief global market strategist at Jefferies. In an interview with Sanam Mirchandani, Wood said that the key thing in 2021 for financial markets is all about how the Fed reacts when it becomes clear that they are way too easy. Edited excerpts:How are you viewing emerging markets against the backdrop of a surge in bond yields?I was expecting the bond market sell-off so I am not surprised. So long as the Fed is talking dovish, the stock markets will continue to rally. The risk to the markets becomes clear that the economies are rebounding more than the Fed was expecting. The risk is that there is a taper but for now Powell is still talking dovish. The stock market will keep going up and the bond market will keep selling off until the Fed reacts.The key issue is how they react. They may try and stop the bond market surge and long-term interest rates rising by adopting some version of what the Japanese call yield curve control. If they do that, then it will be very bullish for Asian stock markets and very negative for the dollar. However, if they don’t do that, and the bonds keep selling off and the stock market keeps rallying, then they will have to admit that they are too easy, and then you will get a tapering scare.For now, the Fed is talking dovish. The Fed is saying that they can change their policy to overshoot their 2 per cent inflation target. So long as they are emphasising that they can overshoot, the stock market will remain positive.When do you think the Fed will react?The key thing in 2021 for financial markets is all about how the Fed reacts when it becomes clear that they are way too easy. We now have the Biden administration wanting to do this very large $1.9 trillion stimulus. Fiscal policy and monetary policy are incredibly easy. At some point, the Fed will have to change but we just have to take it one week at a time. What markets are seeing is not a sell-off — it is a rotation from growth stocks to cyclical stocks. When I say cyclical stocks, I mean stocks that do well when the economy does well like bank and energy stocks.At what rates do you expect the US treasury yields to settle?The more the bond market sells off and the more quickly it sells off, the more the doves on the Fed will want to do yield curve control. You have this very dramatic money supply growth in the US. We have the biggest risk of a pickup in inflation in the US since the early 1980s because of this combination of ultra-easy monetary policy and fiscal policy, which is going to get even more easy with the proposed $1.9 trillion stimulus.How would you rank the Indian equity market within emerging markets?I am bullish on India. The budget has made clear that the government is reprioritising economic growth whereas, for the last year or two, the priority seemed to be the social agenda. Increasing the fiscal deficit seems to be mainly driven by capex. I am constructive on the Indian stock market. My concern in India is the Covid cases that are starting to pick up again. That’s my biggest concern. I don’t believe there will be another lockdown in India, because I think it is now understood that the lockdown was counterproductive. That’s my biggest concern in India, otherwise I am bullish. India is expensive, but on the other hand, the earnings rebound is dramatic. I have been raising weightings in India for the last six months. I am more weighted in India than in China. Last year, I was more overweight China relative to India, and now I am more overweight India relative to China. China has already outperformed a lot. I am bullish on the oil prices so that is also a negative (for India).Are you concerned about inflation in India?No, I am not concerned about inflation in India or Asia. I am concerned more about inflation in the G7 world. Indian policy has been nothing as extreme as the Federal Reserve policy.Which are the sectors you are bullish on in India?I am looking at the domestic demand sectors. So that’s your banks, auto and real estate. The area where you are going to get the most evidence today of a capex is in residential housing properties.

from Economic Times https://ift.tt/3bRfFN9