28 February 2022 - Will history repeat itself ?



The week ended on a positive note for equity markets, reminding us all of previous major military conflicts, when the bottom occurred at the first sound of gunfire. And although it does not feel right to be writing about money and investing at a time when the whole world is watching the tragedy evolving for the people of Ukraine and of course for the innocent Russian people whose financial lives will be severely impacted, our fiduciary duty of managing wealth cannot be left aside.


In this environment, the US markets performed much better than Europe, managing to even finish with small gains. In terms of sectors, investors chose to go with defense sending Healthcare, Technology and Real Estate in positive territory for the week. Investors should probably add to these sectors, as the year is proving to be rather challenging.


The escalation of financial sanctions against Russia by the West, but also the direct military aid to Ukraine is causing again nervousness in equity markets this morning. Had it not been for the Russian call to Ukraine to sit down and negotiate today, we could possibly see a much larger sell-off than the rather small drop of about 2% which is currently anticipated by the futures markets in Europe. And we should not forget that on Friday, in the middle of the fighting, European markets closed with rallies of 3.5% on average. On a positive note, Asia and in particular China are showing small gains at the start of the week, which could be a sign that the region might decouple and become a “safe-haven” as the theater of action is concentrated in Europe.


Macroeconomic data showed a big positive surprise, when it comes to the PMI indices in the Eurozone. The biggest improvement was in the Services sector, as the restrictions due to the Omicron surge are starting to be lifted. France’s February Services PMI rose to 57.9 vs expectations for 53.8, while Germany’s also jumped to 56.6 vs expectations for 53.0.


In the US, the PCE deflator rose to 6.1% higher than the forecasted 6.0% on a yearly basis. The Personal Consumption Expenditures (PCE) index is the favorite metric of inflation, which the FED is watching.


The Q4 2021 GDP in the US was revised even higher to 7.0%, from the preliminary reading of 6.9%, in yet another sign that the current turmoil finds global economies in a very good shape.


In corporate news, Volkswagen announced that it is in advanced talks with Porsche for listing the business unit in the stock exchange. When and if this materializes, it will be a big positive for VW shareholders, as Porsche will trade on a much higher multiple (price to earnings) and the valuation of the VW group should re-rate higher.


Government bond yields are stuck in a range, despite the equity turmoil. As the war in Ukraine is providing support for the usual “safe-havens” such as the US government bonds and their prices tend to move higher, the very positive macroeconomic environment as well as high inflation push investors to get rid of high duration government bonds. The end result is a yo-yo in prices and yields. The 10-year US Treasury yield has been trading in a rather tight range of 1.90-2.00%. In this environment the FED meeting in two weeks assumes a very significant importance.


Gold made a move to 1975$ on Thursday but lost all the gains and finished the week at around 1900$. The week has even started with the yellow metal falling below 1900$, despite the escalation of the situation, which makes the case for a sustainable rally doubtful. One has to take into account also that Russia will probably have to start selling part of its gold reserves in order to finance itrs operations as essentially the biggest part of the Central Bank’s cash reserves have been frozen. A distressed seller of an asset does not bode well for the price of the asset.


Charts of the Week


Markets do not always behave as one would expect them to do based on “pure logic”. A very recent example is the beginning of the rally on March 23 of 2020, just a few weeks since the pandemic broke, with little knowledge about the disease, let alone with no immediate hope for a vaccine. We present here the chart of the S&P500, back in the 2002-2003 period. Equities had been falling for almost two years as the internet stocks bubble had burst in early 2000, forcing the US economy into recession. At the same time the US administration was looking to punish Iraq as a potential refuge of terrorists after the 2001 attacks. When the war finally broke in mid-March of 2003 (yellow circle), it marked the end of the bear market and a big rally started, against all expectations. We would not be surprised if the current turmoil is the catalyst for a rebound, even if that is temporary.



A further analysis of what has happened in the past gives a higher comfort of trying to forecast what happens next in markets. This (rather busy) but interesting chart created by UBS shows the performance of the S&P500 after the breakout of three major geopolitical events (vertical line). In all instances and just as in 2003, the start of the military action usually marked the bottom of the equity market and a few months ahead the index was at higher levels, just as we show on the left chart for 2003. The only exception was the soviet invasion of Afghanistan where the low in the market came after two months, but then again, the index moved higher for a few weeks after the invasion, giving the opportunity to investors to sell at much higher levels, it their intention was to reduce their risk. Of course, if the third World War breaks out, all bets are off...




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• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

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