Has the bear market started for global equities? Christopher Wood answers

What is happening in the US is that the selloff is going from the periphery to the core. We have had very massive selloffs in the populous, thematic tech segment, in biotech stocks. What is happening now is that market leaders like the FAANGs have started to show significant corrections and we will probably only reach maximum sell off when we get much more outflows out of the ETFs.

When do you say that we have not reached the point of maximum pessimism? What indicator are you using for benchmarking purposes – valuations, dollar index, flows, technicals?
As the valuations were so extreme in the US, they can definitely get more valuation compression. Now I am looking to see whether we get big outflows out of ETFs in the month but in the first three months of this year, there were no outflows out of domestic US equity ETFs, Those outflows really began in April.

So has the bear market started for global equities?
Whether you call it a bear market or correction, it is clearly well underway but the S&P is not yet down 20% from the peak. I would not be surprised if it goes down 30% from the peak.

How different is the current market situation from what we saw in the previous cycles in 2000, before the meltdown in TMT stocks and 2008 before the meltdown in financials?
The big difference right now is being triggered by monetary tightening in an environment where the Fed is perceived to be behind the curve and is trying to play catch up having failed to understand that there was going to be a big surge in inflation as a result of a massive money printing which got underway in America in response to the pandemic back in the spring of 2020.

Thus the inflation surge that we saw in America and in other G7 countries last year is the consequence of the money printing we had in 2020.

If we have to crystalise the way how in the near term, inflation would move at 8%? Is the US inflation almost at its peak?
It may be but the real issue is where it settles. So yes, there is a good chance, inflation may statistically peak and that would be a clearer cut story if we did not have this Ukraine conflict going on. Before the Ukraine conflict broke out, it was pretty clear that inflation was likely to peak in the March data point, announced in April. But for now it is much less clear and the ultimate issue of how much inflation comes down or not will depend on how much the Fed ends up really tightening.

Do you think the Fed will over tighten?
Over tightening from what perspective?

While they can be ahead of the curve which is that you start with 25 bps, you have done 50 bps and another 50 bps is coming. But instead of 50 they may do 75?
No, I do not think they will do 75 but the key issue is how long does it go on? The most important issue for financial markets this year is does the Fed execute another U-turn although its language significantly changes throughout the course of the year?

So how should investors protect their portfolio in this kind of an environment because there is a risk off in just about every asset class? Bonds are a poor investment to make but equities are selling off. Bitcoin is selling off. Just about everything is going through a process of risk adjustment?
Yes, but the sector core value equities have outperformed significantly year to date. Anybody who invested in a cyclical value stocks will definitely have protected themselves but what is interesting this year is that the government bond prices have been going down at the same time as the stocks and that is a different development and that means there is positive correlation on the downside in equities and bonds.

This in turn means people who are in bonds as a diversification away from equity risk, have been badly disappointed particularly in the developed world and about my favourite sector means what it was last year and that is energy stocks.

Do you think this transition from growth to value or from growth to cyclical is a multiyear transition and could be a decadal trend?
It will be a multiyear transition if the Fed does not break the back of inflation so that will depend on how hawkish the Fed really tends to be. The Fed is talking extremely hawkish, the Fed really tightens by the degree it is talking about and we have real significant balance sheet contraction. The Fed can definitely break the back of inflation but my personal base case is that at some point, the Fed will back off before they really break inflation.

If central banks are currently trying to break the back of inflation and inflation is suddenly the public enemy number one, is it a good time to invest in energy and commodities?
The reason to be invested in energy stocks is because there is a hedge on the rest of your portfolio because there is a significant risk that if the oil goes through $150 or higher so I was concerned. I thought oil could get $150 even before the Ukraine conflict breakout.

Chris Wood has this reputation that he loves India and over the years you have demonstrated that with your thoughts, with your research paper and with your newsletter. But strangely enough, your current India holding is a mild over. In the past, you had run model portfolio recommendations where India was significantly overweight. Why is that?
A, because in the short term, the RBI has begun a tightening cycle and my guess is there could be two more rate hikes in the next two meetings. I am concerned about higher oil prices. So I have been surprised how resilient the Indian market has been so far this year with that big foreign selling. But that has been more than absorbed by very impressive domestic inflows but tactically, in the short term, we are still at risk of downside in India. So my base case will be to raise the Indian allocation materially if we get more of a correction.

Can you define correction for us, 5%, 10%…?
People here seem to look at the Nifty more than the Sensex, So, if we got to 14,500 on the Nifty, then I will be definitely raising the Indian weighting because we got tactical risk short term, monetary tightening, oil price and the food inflation has been aggravated by the Ukraine situation.

But on the big picture, the good news in India is that we finally saw evidence of the residential property cycle turning up last year after a seven-year downturn. That is very important because that is the supplier for the whole economy and my base case is that residential cycle can run for as long as the last down cycle went on which is seven years and that was a period of positive employment generation.

I am still of the view that once these various shocks are out of the system, we can move into a broader capex cycle and I am looking at India as being in a similar macroeconomic situation where we were in 2003, which is the last time India entered the residential property cycle.

I distinctly remember reports in 2003. You did mention why the Indian real estate stocks would do well and I am not surprised that in your current long only portfolio, there is , and .
Yes but I could have other names too. I am running it as a structural portfolio. Tactically, if I was running the portfolio for three months, they would look a bit different.

And how different would that three-month portfolio be?
Well it would be more defensive.

When you say defensive, a combination of consumers IT, pharma….?
One would not have rate sensitive stocks on a short term view because the RBI is raising rates but the monetary tightening cycle in India is nothing like what you are potentially seeing in America.