“From an investment standpoint, any renewed market setback on concerns of a second wave of Covid spread can be an opportunity to add to cyclical exposure,” said Wood.
Cyclical stocks are those that move in tandem with the economy. When economic growth slows down, stock prices fall and vice versa. Capital goods, banks and financials, auto, cement, metals, consumer durables, etc. fall in this bracket.
Wood outlined two reasons for his strong conviction on cyclical stocks “The base case is that the world is much nearer to the end of the pandemic than the beginning, in line with Farr’s law,” he said.
William Farr, a UK-based epidemiologist and early statistician, in his observation in the 19th century said once peak infection has been reached, then it will roughly follow the same symmetrical pattern on the downward slope.
Wood referred to the peaking of infection in large parts of the world. However, India is yet to show signs of peaking and is reporting nearly a lakh cases every day, with some variations.
Wood said the second reason for his conviction is fears of any renewed downturn, as has started reflecting in the “risk off” market action in recent days. This, he said, will lead to further monetary and fiscal stimulus.
“If market action is bad enough, politicians will still come together quickly since, as noted by Jefferies US chief economist Aneta Markowska, the unemployment insurance funds allocated by the executive order signed by Donald Trump on August 8 will be depleted by early October creating another ‘fiscal cliff’ in disposable income,” said Wood.
This will result in disposable personal income contracting by 10 per cent QoQ in December quarter, creating significant downside risk to the consensus GDP forecast of 5 per cent.
Hence, Wood believes the economy will improve and this makes a case for grabbing cyclicals at their low point to ride a potential rally.