Equity markets experiencing weakness
Another week, another series of sharp market gyrations. Despite the anxiety many investors may be experiencing, we believe that concerns about the health of capital markets and the impact of rising interest rates are not justified.
We continue to remain constructive, although we do expect higher levels of volatility this year than in 2021. This makes a long-term and diversified investment strategy more important than ever for long-term investors.
Let’s take a look at what’s going on across global markets, the macro situation and how all this is impacting our portfolio strategy.
The Fed is on the move
A useful starting point is the outcome of the latest Fed meeting.
With both inflation and maximum employment goals now seen as broadly met, or even exceeded, policymakers are on track to raise rates off their lows at the March meeting.
Equities are once again volatile and yields are rising across the curve. We think the Fed will steadily tighten financial conditions but, given the recent market volatility and risks to the outlook, will not tighten so aggressively as to hinder the recovery.
Other markets remain more stable. As the equity sell-off accelerated, the bond market was relatively solid with credit spreads only widening moderately.
While there are downside risks from Omicron, geopolitical tensions and potential policy mistakes that lead to excessive tightening of financial conditions, we expect solid economic and earnings growth, albeit no longer accelerating as last year.
We continue to see room for risk assets to outperform in an environment of relatively constructive macro prospects. This is reflected in our tactical overweight in US equities and some higher-yielding credit exposure.
Understanding what’s going in the stock market
As we highlighted last week, equity markets have experienced a sharp rotation from growth to value. That may give many investors the impression that the fundamental outlook for growth-orientated stocks is deteriorating. However, the evidence we have so far is that this is not the case.
Let’s take the high-profile example of Microsoft, a textbook case of what we regard as a quality growth company. Microsoft released its Q4 2021 financial results a few days ago, and its performance and outlook remain highly encouraging. Revenues, net income and earnings all experienced 20%+ growth year on year, continuing the recent trend.
It is also worth noting that Microsoft’s balance sheet is so strong that it can fund the acquisition of Activision Blizzard – one of the world’s leading computer game publishers – for $70 billion from cash on hand.
Yet, despite these facts, investors can now buy Microsoft for a similar multiple of earnings as before the pandemic, despite clear evidence that Microsoft’s business has materially accelerated.
This is one example of how the outlook remains favourable for quality growth companies.
We remain focused on delivering long-term returns, keeping an eye on tactical opportunities
To sum up, our macro outlook remains constructive. Yes, economic and earnings growth is moving past the peak and interest rates are rising off the lows. But we anticipate a solid pace of expansion both at the macro and corporate level.
All this seems to be consistent with the fact that, while macro data surprises in the US are negative, the actual level of the macro indicators looks relatively good. Elsewhere, macro surprises are positive. The Fed and other central banks look set to hike rates because things are good – not to crush the economy.
There is some uncertainty out there, not least the Russia/Ukraine situation. We’re closely following developments and are aware that sanctions can impact neighbouring regions. Western and Eastern European countries are most exposed to Russia, while potential spikes in oil and gas prices and, in some cases, financial contagion (for example, through widening credit spreads) are more of a risk. That said, our tactical asset allocation doesn’t have any direct overweight in these regions.
Despite these near-term uncertainties, we continue to believe that the environment is supportive for risk assets. We remain comfortable with our tactical allocations, such as US equities and emerging-market hard-currency and Asian high-yield bonds, while underweighting lower-yielding government and investment-grade bonds in developed markets.
Bill Street, Quintet Group Chief Investment Officer
Daniele Antonucci, Quintet Chief Economist & Macro Strategist
Important Information
This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document – based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 17 January 2022, and are subject to change. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.
Copyright © Quintet Private Bank (Europe) S.A. 2022. All rights reserved.
