Use any market correction to stock up on cyclicals, says Chris Wood

The over 7 per cent fall in the markets (S&P BSE Sensex) from its 52-week high hit in md-February has not shaken the confidence of Christopher Wood, global head of equity strategy at Jefferies. On the contrary, he suggested in his weekly note, GREED & fear, that investors use the dip to increase allocation to cyclical sectors.

“There has been a bit of a pullback in the cyclical trade. This, in GREED & fear’s view, is nothing more than profit taking as the end of the quarter approaches after the big price gains recorded. For such reasons, GREED & fear views the pullback as a buying opportunity to add to cyclical exposure,” Wood said.

From their mid-February low, the Indian markets have been on a roller-coaster ride with the frontline indices correcting as Covid cases in the country showed a gradual rising trend. That apart, weak global cues also dented sentiment. Since then, Covid cases have also spurted with most of the impacted people concentrated in Maharashtra. That said, there are no signs of renewed across the board lockdowns yet. “For the moment, the above suggests that February marked a temporary peak in the post-Covid rebound in economic activity,” Wood cautions.

Besides Wood, analysts at Credit Suisse Wealth Management also recommend hiking exposure to cyclical stocks as they do not see a repeat of the stringent lockdown seen in 2020. Instead, they believe economic growth could surprise in fiscal 2021-22 (FY22), which in turn may lead to better-than-expected corporate earnings momentum.

“We maintain our cyclical bias in our model portfolios – albeit a little lower than February – and continue to prefer private banks, capital goods and industrials, and sectors that can benefit from the vaccine rollout and opening up of the economy,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management, in a recent co-authored note with Premal Kamdar.

Stimulus package

Over the next few weeks, Wood feels that the markets will start focusing on the US government’s stimulus package and how can the Biden administration secure Congress’s approval for the same. The slowness of the vaccine rollout in continental Europe, however, can definitely put back the economic recovery in the region by a quarter, he said.

“The focus will grow in coming weeks on the scale of the Biden administration’s pending infrastructure stimulus, which now could be as big as $3 trillion. Coming weeks will see growing discussion on the tactics employed to get this package through Congress as well as how much will be paid for by increased taxation,” he wrote.

Meanwhile, Fitch has revised up the US GDP growth forecast for 2021 by 1.7 percentage points (ppt) to 6.2 per cent on the $1.9 trillion fiscal stimulus package recently passed and stronger-than-expected incoming economic data for the first quarter of 2021 (Q1CY21).

“The US Fed has become more tolerant of higher inflation and is unlikely to start discuss tapering until after the summer. Following $2,980 billion of asset purchases in 2020, we expect a further $1,400 billion in 2021 and $700 billion in 2022, with no policy rate hikes until 2024,” wrote Brian Coulton, chief economist at Fitch Ratings in a co-authored report with Pawel Borowski.