Jefferies: Reduce holdings in US stocks! Increase investments in Europe, China, and India

According to the Zhitong Finance APP, Christopher Wood, an analyst at the American investment bank Jefferies, stated in a report on April 24 that investors should reduce their holdings of U.S. stocks during the stock market rebound while increasing investments in Europe, China, and India.

He wrote that the 47th president (Donald Trump) still behaves like a bull in a china shop.

From the market performance perspective, this is extremely unfavorable for all U.S. financial assets, whether stocks, government bonds, or the dollar. The rebound in the U.S. stock market over the past two days was directly caused by Donald Trump's apparent shift in attitude regarding tariffs on China, which also confirmed Jefferies' view from last week (April 17) that the U.S. has no advantage in this trade game.

Meanwhile, the U.S. dollar index easily fell below the 100 mark (see Figure 1).

Recently, long-term government bond yields have also resumed their upward trend, although short-term yields reflect the market's expectations for further interest rate cuts by the Federal Reserve. The yield on the 30-year Treasury bond is currently 4.79%, which is 96 basis points higher than the 2-year Treasury yield, having reached 114 basis points on Monday, the largest spread since January 2022 (see Figure 2).

(U.S. 30-year and 2-year Treasury yields)

In the face of market concerns about a U.S. economic recession, the performance of the bond market not only indicates that the risk parity strategy has failed but also suggests that investors no longer view long-term government bonds as risk-free assets. This is a significant change, which Jefferies has discussed multiple times before.

Before Trump's recent change in attitude, the market generally attributed the new round of risk aversion to his criticism of Federal Reserve Chairman Jerome Powell. However, Jefferies believes that the volatility regarding tariffs has a more critical impact on the market. Trump's accusations are unnecessary and merely seek a scapegoat for a potential economic recession.

In fact, Trump's criticisms have, to some extent, led Powell to be viewed as a Paul Volcker-type figure, but Powell's past performance indicates that he tends to adjust policies quickly in the face of risks.

It is worth noting that since the beginning of this month, the Federal Reserve has significantly slowed the pace of its balance sheet reduction.

In the March meeting, the Federal Reserve announced that starting in April, it would reduce its monthly holdings of U.S. Treasury bonds from $25 billion to $15 billion while maintaining the monthly reduction of $35 billion in mortgage-backed securities unchanged In addition, if long-term bond yields continue to rise, the Federal Reserve is likely to restart quantitative easing to support the Treasury market, although this will accelerate the depreciation of the dollar. The current key pressure point is whether the 10-year Treasury yield will significantly break through 4.5%. So far this year, the dollar has depreciated by 9% against the euro (see Figure 3), while the European Central Bank has lowered the deposit facility rate by 50 basis points to 2.2%, and the Federal Reserve has kept rates unchanged (see Figure 4), indicating the current weakness of the dollar.

Figure 3: USD to EUR Exchange Rate

Figure 4: European Central Bank Deposit Facility Rate

Clearly, low-income consumers in the United States have fallen into an economic recession. It is estimated that the wealthiest 10% of the population currently contributes 50% of consumption. Therefore, the wealth effect brought about by the decline in financial asset prices may impact the economy.

Jefferies insists that investors should reduce their holdings of U.S. stocks during market rebounds, as seen in the past two days, while increasing investments in Europe, China, and India.

Furui's fundamental view is that the U.S. stock market's share of the MSCI All Country World Index reached a historical peak on December 24, 2024, similar to the Japanese stock market at the end of 1989, unless there is evidence to prove this view wrong.

Notably, Citi's U.S. Earnings Revision Index has been in negative territory for 17 consecutive weeks since mid-December last year. The latest reading for the week ending April 11 was -0.62, the lowest level since April 2020 (see Figure 20). This index is derived by calculating the difference between the proportion of listed companies that have raised their earnings per share (EPS) expectations and those that have lowered their expectations.

Figure 20: Citi's U.S. Earnings Revision Index