Equity, money markets in the US remain polarised, says Chris Wood

Equity and money markets in the United States (US) remain polarised and are betting on two different outcomes in the months ahead, wrote Christopher Wood, global head of equity strategy at Jefferies in his latest note to investors, GREED & fear.

While the US stock market, he wrote, is priced for an idealised soft landing of the economy, the money markets are priced for a degree of monetary easing, which only seems likely in the event of a recession.

"The Fed funds futures are now discounting 144 basis point (bp) of rate cuts this year, though down from 168bp anticipated on January 12. GREED & fear’s base case remains that a downturn is coming as signaled by the collapse in US M2 growth," he said.

Another key development in the US, that the global equity markets would eye over the next few months, is how the political landscape shapes up ahead of the presidential elections. Donald Trump’s victory by a 30-point margin in Iowa recently, Wood believes, is the latest evidence that the more indictments are levelled against him (Trump), the more support for him grows.

"A recent poll also found that Trump was leading Biden in Michigan, a key battleground state, by eight percentage points. The major problem for the 45th American president is that the election is not being held now. But if a downturn does hit the US in coming months, causing a stock market sell-off with it, it would set up the stock market for a rally in anticipation of pro-growth Trumpian policies," Wood said.

Bond yields

Back home, the rising bond yield in the US that hit 4.16 per cent recently, has put equity market investors in a spot of bother. Foreign institutional investors (FIIs), analysts said, have taken money out of emerging markets, with Indian markets seeing a FII sell-off to the tune of over Rs 20,500 crore in the last few trading sessions alone.

FII selling due to external factors, analysts say, has always been opportunities to buy, and this time is no different.

"An important trend in the market that has implications for retail investors is the revival of the tug of war between FIIs and domestic institutional investors (DIIs). FPIs have sold equity massively during the last few days. This is partly in response to the rising bond yields in the US, where the 10-year yield has risen to 4.16 per cent, and partly due to the high valuation in the Indian stock market," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Market strategy

The Indian economy, according to analysts at BNP Paribas India, remains on a strong fundamental footing with inflation-related concerns and the worries related to the outcome of general elections now easing a bit. However, they do caution against the high valuations.

The other concern, according to Kunal Vora, Head of India Equity Research at BNP Paribas India, is that the (economic) recovery has not been broad-based, with mass-consumption categories still under pressure. A renewed interest in China and an increase in LTCG tax on equities as the government looks to mobilise resources to drive mass consumption are also potential risks.

"We expect Indian equities to trade at a premium to their historical valuations. In our base case, we expect Nifty 50 to trade at 20.2x December 2024 next 12-months (NTM) P/E. We arrive at a Nifty Index target of 23,500 in our base case by December 2024," he said.

Among sectors, Vora prefers affluent consumption over mass; prefers private banks, given their strong fundamentals and reasonable valuations.

"We expect IT services growth to recover and telcos to raise tariffs. We would avoid staples and pharma for growth challenges. We expect autos to consolidate after a strong 2023," he said.