Geopolitics remains by far the biggest risk to markets, says Chris Wood

Geopolitics, and, in particular, the growing risk of escalation in the Ukraine conflict, remains by far the biggest risk to the markets, wrote Christopher Wood, global head of equity strategy at Jefferies in his weekly note to investors, GREED & fear.

"The risk here remains that it is in Ukraine’s interest to try and trigger direct NATO involvement prior to the US presidential election and the possibility of the re-election of Donald Trump," Wood said.

Those at BofA Securities, too, in a recent note had suggested that the biggest 'tail risk' to the markets remains geopolitics with 18 per cent of the global fund managers surveyed by the brokerage in May agreeing to this. 

 

"Higher inflation remains the biggest 'tail risk' according to 41 per cent of FMS investors. Concerns over geopolitics declined to 18 per cent (from 24 per cent in April) but still at the second spot. Economic hard landing rose to 15 per cent from 12 per cent in April," analysts at BofA Securities said in a recent fund manager survey (FMS). 245 panelists with $642 billion worth of assets under management (AUM) participated in the May survey, held between May 3 and May 9, BofA Securities said. 

Back home, the midcap segment, Wood said, remains vulnerable to a correction. He believes there will also be a temptation for investors to tilt the portfolio more towards consumption plays, relative to investment plays. 

This, he believes, is likely in the backdrop of the new National Democratic Alliance (NDA) government’s focus on populist measures, whereas a feature of the past ten years of the Modi-led government has been a fiscal deficit driven by spending on physical infrastructure rather than transfer payments. Measures to revive the rural economy, Wood said, could be accorded priority by Modi 3.0.

The Lok Sabha election result, he believes, has probably reduced the prospects of state-owned enterprises (SOE) reform and public sector divestment, both of which GREED & fear would have expected Modi to focus on in a third term of BJP government free from coalition constraints. 

"For this reason, GREED & fear will shave the weighting in public sector companies in the long-only India portfolio. The weightings in ICICI Bank, State Bank of India, REC Limited and Coal India will be reduced by one percentage point each, while an investment in PolicyBazaar will be introduced with a 4 per cent weighting,” Wood wrote.