Buy growth, value stocks to beat inflation: Wood

For equity portfolios to beat inflation blues, investors should adopt the strategy of owning both growth and value stocks, suggests Christopher Wood, global head of equity strategy at Jefferies. Global fund managers, he says, should keep an eye on the five-year forward inflation expectation rate in the US to get a sense of the timing of taper by the Federal Reserve.

In the Indian context, Wood has picked up a stake in Bajaj Finance in his Asia ex-japan thematic equity portfolio for long-only absolutereturn investors. In August, he had increased his exposure to Indian equities by 2 percentage points in that portfolio.

“Continue to recommend for equity portfolios a barbell strategy of owning both growth and value. Ultimately, the relative merits of both will be determined by the outcome of the current debate on whether the pick-up in inflation is transitory or not. Still, even if it is not transitory, growth stocks would not be 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,” Wood wrote in his weekly newsletter to investors, GREED & fear.

Typically, a growth stock is of a company that generates substantial and sustainable positive cash flow and whose revenues and earnings are expected to increase at a faster rate than an average company within the same industry. On the other hand, value investing is a paradigm involving buying securities that appear underpriced by some form of fundamental analysis.

At its Jackson Hole meeting recently, the Fed Chair Jerome Powell hinted at a taper in case the economic progress met the set targets. With the next meeting of the FOMC on September 2122, analysts say if the economy continues to evolve according to the Committee’s expectations, the Fed is likely to give more unconditional advance notice of the start of tapering.

“This could be followed by a formal announcement of the start of tapering at the subsequent meeting in early November. If the economy disappoints, or too many threaten to dissent in November, the FOMC can still make this announcement at the mid-december meeting,” says Philip Marey, senior US strategist at Rabobank International.

The Indian stock markets, Wood believes, are likely to underperform their global peers in case of a global risk-off triggered by a taper scare. Analysts at Julius Baer also share a similar view and say investors may favour safe-haven plays as the US Fed inches closer to tapering its $120 billion a month liquidity programme.

“CONTINUE TO RECOMMEND FOR EQUITY PORTFOLIOS A BARBELL STRATEGY OF OWNING BOTH GROWTH AND VALUE. ULTIMATELY, THE RELATIVE MERITS OF BOTH WILL BE DETERMINED BY THE OUTCOME OF THE CURRENT DEBATE ON WHETHER THE PICK-UP IN INFLATION IS TRANSITORY OR NOT” CHRIS WOOD, Global head of equity strategy, Jefferies