Why did Chris Wood of Jefferies sell his holding in HDFC Bank stock?

Global fund managers remain bullish on the Japanese stock markets, which is now their most preferred destination in the Asian region. Both Morgan Stanley and Jefferies in their recent reports, have cited their preference for the Land Of The Rising Sun, which is fast becoming the land of the rising equities, too.

Within the global equity markets, Morgan Stanley’s most preferred region is Japan, although after the rally (that saw Japan's key benchmark - the Nikkei 225 hit a three-decade high), they recommend exposure to corporate reform and nominal reflation themes. Europe, they said, has grown more attractive on the margin.

“Japan continues to enjoy secular tailwinds, and in Europe we now expect equities to see over 10 per cent upside this year on hopes of a Fed pivot à la 1995. We expect the US to have an earnings recovery in 2024 but with a more challenging first half. Within emerging markets, thematics matter – we like India and Mexico for their secular stories, e.g., friendshoring in a multipolar world and good demographics,” the Morgan Stanley note said.

Within the Asian region, Christopher Wood, global head of equity strategy at Jefferies, too, remains bullish on Japan and expects Japanese bank stocks, he said, to take the markets higher from here on.

“GREED & fear remains maximum bullish on Japanese banks with a 27 per cent weight in the long-only Japan equity portfolio compared with a 7.6 per cent weighting in the Topix. Banks remain the best play on the end of deflation story. The first driver is interest rate normalisation as reflected in Japan’s increasingly steeper yield curve. The second is growing hopes of a commercial bank funded capex cycle,” Wood wrote in his weekly note to investors, GREED & fear.

The Japanese bank stock chart, Wood said, looks encouraging in terms of a recent breakout from the March-May consolidation pattern. 

"This suggests rising confidence that Bank of Japan Governor Kazuo Ueda is under growing pressure to allow further normalisation of rates," Wood said.

He will initiate a position this week in Japan’s SMFG in the global long-only portfolio, which will be paid for by selling the investment in HDFC Bank.

Perfect landing

Calendar year 2024 (CY24) will be a good year for ‘quality stocks and bonds’, according to analysts at Morgan Stanley. Stocks, they said, have priced in a ‘perfect landing’ scenario so far as the global economy is concerned.

That said, Morgan Stanley expects the US Federal Reserve (US Fed) to cut interest rates in September 2024 instead of June, as the incoming data on the economy may not be sufficient for the US central bank to ascertain a confirmed trend by the next month.

“The start of cuts – even if pushed back – is a good environment for fixed income over equities. In particular, a smoother landing than we had expected supports corporate credit as defaults stay contained, carry is attractive, and convexity is good. Stocks, on the other hand, have priced in a perfect landing and risk underperforming if data get hotter or colder,” Morgan Stanley analysts wrote in a recent note.