What does Chris Wood think about stock markets, defence stocks, US dollar?

The most likely bloc to enjoy long-term appreciation against the USD remains Asian currencies in what amounts to a reversal of the dynamic triggered by the Asian Crisis nearly 30 yrs ago, Wood said

Financial markets across the globe have a volatile few weeks as they braced for, and then took in their stride, US president Donald Trump's tariff-related developments. 

 

Most analysts suggest that the tariff-related fears seem to be over – at least for now – as a host of countries are at the negotiation table with the US president.

 

Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear, suggests that the US markets are past their prime and expects the US dollar to weaken.

 

Here are his views on how the markets are likely to unfold going ahead.

 

 

Chris Wood's stock market outlook

 

Global equities have now broken out decisively on the chart with the MSCI All Country World ex-US breaking a trading range that has held since 2007. This is technical confirmation of GREED & fear’s continuing base case. That is that America reached an all-time peak of 67.2 per cent of the MSCI All Country World Index on December 24, 2024 amidst euphoric chatter about “American exceptionalism”.

 

This does not mean that the American stock market has to collapse. The point is that a share of 67 per cent is huge given America accounts for only 26.4 per cent of the world economy in terms of nominal GDP in US dollar terms, even allowing for the global franchises of US Big Tech. But it does suggest that the US dollar has entered a long-term downtrend, which is also the base case here.

 

Chris Wood on defence stocks

 

The latest evidence that the Trump agenda has woken up Europe is the German commitment to increase its defence spending to 5 per cent of GDP. Bank stocks and defence stocks should form a core part of any European equity portfolio. The previously recommended pair trade here, namely long European defence stocks and short American defence stocks, continues to work.

 

Chris Wood on Moody's US rating downgrade

 

Moody’s US sovereign downgrade last week has not been a big deal in terms of moving markets, since the rating agency’s downgrade has only arrived where S&P and Fitch already were. Still the downgrade will mark a chapter in the history books.  ALSO READ | Moody's US downgrade deepens investor fears over rising fiscal risks

 

Chris Wood on US dollar outlook

 

There are several reasons to bet on a weaker dollar. One is that Donald Trump himself wants a weaker dollar. Another is that the highly personalized nature of Trump’s style of governing, with the resulting unpredictability reflected in the twist and turns on tariffs in recent weeks, should create a natural discount.

 

Still by far the most important reason to assume a long-term weakening of the US dollar is that America’s extreme fiscal deterioration post-Covid, courtesy of Fed largesse, means that the most likely end game remains a growing resort to financial repression resulting in some form of yield curve control and even possibly exchange controls. Such a trend would clearly be US dollar bearish, most particularly yield curve control.

 

Chris Wood on Asian currencies

 

The most likely currency bloc to enjoy long-term appreciation against the US dollar remains Asian currencies in what amounts to a reversal of the dynamic triggered by the Asian Crisis nearly 30 years ago. This is not only because the Trump administration is targeting mercantilism. It is also because Asia, as a region, has the savings.

 

Chris Wood on private equity

 

The Trump administration’s accelerating U-turn on the tariff issue must have come as a massive relief for the private equity industry, and its prime funder at the margin, private credit. Indeed the lobbying of the administration must have been intense. This is because the PE industry has 29,000 companies it wants to list globally. The last thing the industry needs is the imminent threat of a US recession, and related global slowdown, resulting from the original tariff agenda as announced on “Liberation Day”.

 

This can be seen by the action in the relevant stocks. The S&P Listed Private Equity Index collapsed by 27.1 per cent in the risk-off move and was one of the worst performers in the US market in that correction. And it has since been one of the biggest outperformers as investors have celebrated the significantly reduced risks of a US recession.

 

GREED & fear takes this as confirmatory evidence that private equity and private credit will be the big losers in any US downturn, which will be bad news for the many institutions who have allocated an extraordinarily high percentage of their assets to this fundamentally illiquid asset class. But if the downturn does not happen the base case is that the flows into private credit continue even as owners of private equity funds are increasingly desperate to reduce exposure.

 

A new Fitch report has highlighted the ongoing surge in US commercial bank lending to non-bank financials. Indeed the surge in lending is accelerating. This demonstrates that problems in private credit have the potential, at least, to spread to commercial banks.