24 January 2022 - Who let the bears out ?



The sell-off in US equity markets intensified last week, as investors continue to re-price Growth stocks ahead of the upcoming rise in interest rates. What started as a year of great optimism is turning into a nightmare, especially for the most popular trades of the last two years, namely Technology. Nasdaq is already down 12% in less than one month, after falling a stunning 7.5% last week alone. European indices are holding up better, as they contain a much higher percentage of Value stocks (cheap, low growth, usually high dividend) which continue to do well on a relative basis since early 2021. However, Value stocks have continuously underperformed Growth stocks during the last 10 years.


Chinese equities are for the moment a “safe-haven” in 2022, showing less volatility than their US peers, while Asian Technology appears to be attracting the capital leaving the US Tech names.


The significant divergence in monetary policies between the FED and the Chinese Central bank is starting to become apparent. At a time when the market is now starting to assume that the interest rate hike in March by the FED could involve 50bps instead of 25bps, the Chinese have started easing their policy by further reducing rates last week. This time, it was the key mortgage lending rate which was lowered by 10bps, in response to the worsening situation in the real estate market. The decision helped real estate bonds and equities recover significantly, offering some hope that the worst is over for the Asian region.


The Russia-US spat over Ukraine did not help sentiment either. There are reports that Russia has deployed more than 100’000 troops already in the region, while President Biden sounded ready to act if necessary. The talks held in Geneva between Foreign Ministers, Lavrov and Milliken, did provide some temporary relief.


There are some positive news to smile about, however. with respect to the pandemic. More and more countries are announcing the lifting of travel restrictions (UK, Switzerland) while others (France) are planning the re-opening of night clubs and other venues which had been severely restricted at the onset of Omicron. Some countries are already talking about lifting the requirement for a “covid pass” to enter restaurants etc. as soon as March or April. We seem to be getting at the peak of this phase with a much better situation in terms of hospitalizations and deaths and many scientists are calling the “end of the pandemic” and the “start of the endemic phase” soon.


The corporate results are in full swing and the next two weeks will bring a lot of news to digest. If there is any preliminary trend one can say that higher wages are “eating-up” the margins of companies. Guidance from the banks for 2022 is lackluster, due to higher expected wages (Morgan Stanley stood out as a glowing exception). Technology names will start reporting this week, hoping that the price action is better than Netflix’s on Friday. Shares fell 22% as the company provided guidance for much less growth in the next quarter and hence for 2022, despite beating results for the current quarter. This is what we mean by “re-pricing of growth”, mentioned at the first sentence of this report. Microsoft has agreed to buy electronic games powerhouse Activision Blizzard for almost 70bn$, although the deal must undergo scrutiny by the antitrust authorities.


Gold made an attempt to break-out of its downtrend, trading close to 1845$ and helped by the negative sentiment in markets but primarily by the geopolitical tensions.


Bond yields retreated in response to the volatility in equity markets. The 10-year US yield fell to. 176% down from 1.90%, the previous week.



Charts of the Week


The number of companies in the US, whose stock price is now more than 20% below their recent high has exploded to the highest level since March of 2020, when the outbreak of the pandemic led to a huge sell-off in the markets. We observe the index levels that are just a few percentage points below their record highs, but under the surface there has been a bloodbath in hundreds of stocks, primarily in Technology and other growth sectors. The “ultra-growth” stocks, which were the main beneficiaries of the pandemic (Peloton, Moderna, Zoom etc) are now down more than 50-60% from their 2021 highs, in a sign that the bubble there has burst for good. We are going through a revaluation and repricing of growth and the winners of the previous 2-3 years look vulnerable, given the new environment of higher inflation/higher rates.


In a high inflation environment, it is worth looking at the sectors whose profits are thought to be rather resilient, as their business models exhibit what we call “pricing power”. Pricing power refers to the fact that companies can pass higher prices to their customers without risking the growth of their revenues. The above table shows the level of profit margins for some sectors graphed against the volatility/variation of that margin. The higher on the table are the sectors with the highest margins and towards the left are the sectors with the lowest variation in margins. The top-left corner (shaded) is therefore the best place to be with regard to this parameter. Having said that, companies in some of these sectors are already trading at premium, “expensive” valuations and the next 6–9-month price performance is all but guaranteed.



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