January was not an easy month for global financial markets. The global equity index in EUR lost nearly 4%, with a more pronounced decline on US markets (-4%), particularly in the technology sector (Nasdaq down -8%) while European markets did better, shedding a little over -3%.
At the same time, bonds did not fare so well either, with sovereign yields following upward trajectories on both sides of the Atlantic.
During this difficult month for all asset classes, oil stood out: the price of Brent rose from USD 77 to USD 89, i.e. a nearly 15% increase. The imbalance between supply and demand, combined with geopolitical tensions, supported the outperformance of oil.
In this context, the aggressive stance of the Federal Reserve and its members with regard to monetary tightening proved to be the main source of concern for markets. Indeed, inflation figures are worrying central bankers and investors around the world. For example, US inflation climbed to 7% last December, a record since 1982. In Europe, inflation figures are also very high, having reached 5.1% in January, with the rise in energy prices making a very large contribution to this trend.
As we know, the central banks’ primary role is to preserve price stability. It is therefore not surprising that they are preparing to raise their key rates and end their asset purchase policies.
urrently, for the US, markets are expecting four or even five rate hikes of a quarter notch each, which would bring its rate to 1.2%. The eurozone is following suite, with expectations suggesting two hikes before the end of 2022. Some economists and market comments go even further, talking about six to seven rate hikes in the US this year.
As equity markets have largely benefited from the low interest rates, the current episode of stress is not surprising during this period in which the financial press is headlining remarks in favour of an aggressive rise in interest rates.
That said, we need to look at this bidding race in relative terms: knowing how to remain reasonable is key in an environment marked by volatility.
Although it is widely accepted that the Fed will begin its monetary tightening cycle, there is no guarantee that it will go as far as some analysts predict. Let us not forget that inflation expectations remain well anchored at quite acceptable levels. While current figures are high, most of the forecasts, including those of the central banks, point to a downward trend in inflation by the end of the year. This is why we recommend putting things into perspective and being careful with respect to the overbidding on future rate hikes.
On the economic front, we keep our scenario of fairly robust economic growth in 2022. The International Monetary Fund recently revised its growth expectations for this year to 4.4%. This figure is a little lower than in its previous forecasts, but remains entirely acceptable. In general, growth expected in developed countries has also been revised slightly downwards, but we are still well above the trend, with expected growth rates of around 4% for the US and the eurozone.
In this favourable economic environment, we continue to favour equities over bonds. Of course, monetary tightening may be a source of volatility on various occasions, but we believe that this does not call into question the bullish cycle on equity markets. With regard to our sector allocation, we continue to believe that we should favour sectors with high growth potential such as technology, consumer discretionary and healthcare, while maintaining a cyclical exposure through industry or financials.
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