Buy growth and value stocks to beat inflation woes, advises Chris Wood

Investors should buy growth and value stocks in order to beat the rising inflation, advised Christopher Wood, global head of equity strategy at Jefferies in his latest note to investors, GREED & fear.

Typically, growth stocks are those companies where the rise in sales and earnings is expected to be at a faster clip than the market average over a period of time. Value investing, on the other hand, is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.

“GREED & fear maintains the preference for the long-recommended barbell approach (of owning growth and value stocks) because the inflation risks are far from over, though the peaking out of supply chain problems will at some point trigger a narrative to that effect in the markets,” Wood said.

Led by a sharp rise in commodity prices, especially crude oil, and supply-side issues, most economies across the globe have been battling rising inflation over the past few months. In the US, headline consumer price inflation (CPI) rose by 0.9 per cent month-on-month (MoM) and 6.2 per cent year-on-year (YoY) in October, compared with 5.4 per cent YoY in September and consensus expectation of 5.9 per cent YoY. This is the highest inflation number since November 1990. 

In the Indian context, retail inflation hit 4.48 per cent in October from 4.35 per cent in September, reversing the four-month downward trend. Core inflation, which relates to non-food and non-oil items, rose to 5.8 per cent in the month after remaining stagnant at 5.6 per cent in August and September, data show.

The rise in inflation has been another sore point for analysts, who have now started to caution against the sharp rally in Indian equities that has given rise to valuation concerns. Most foreign brokerages, including CLSA, Goldman Sachs, Nomura, UBS, Morgan Stanley and HSBC have indicated an unfavourable risk-reward ratio as regards Indian equities. READ ABOUT IT HERE

US Fed policy

The rise in inflation, at least in the US, according to analysts at Goldman Sachs, is temporary and could see the US Federal Reserve (US Fed) hike rates sooner-than-expected.

"The biggest surprise of 2021 has been the goods-led inflation surge. This recently prompted us to pull forward our forecast for Fed lift-off by a full year to July 2022. Subsequently, we expect a funds rate hike every six months, a relatively gradual pace that assumes a normalisation in goods prices and in overall inflation," wrote analysts at Goldman Sachs led by Jan Hatzius, their chief economist.

Wood, on the other hand, does not expect a meaningful tightening of the policy by the US central bank.

“If a monetary tightening scare remains the obvious risk for stock markets at some point in the future, GREED & fear continues to find in meetings with investors that most fund managers share GREED & fear’s view that the Fed will not engage in meaningful tightening. This, and the fundamental unattractiveness of G7 government bonds, explains the continuing resilience of equities,” Wood wrote.