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WILL EQUITIES PAUSE FOR BREATH AND BROADEN OUT?
Share prices have largely been rising for over 18 months and the
S&P 500 registered more than 60 record highs over the course
of 2022 alone. This has been despite economic challenges in
the background, not least a global pandemic, and there has
been growing dissonance between these ever-rising markets
and that lengthening list of fundamental concerns. News on the
Omicron variant was enough to chip away at market foundations
towards the end of 2021 and served as a useful case study on
sentiment. As details filtered out, the FTSE 100 registered the
worst day of the year on Friday 26 November only to recover
the following Monday and drop again on Tuesday, all with
no discernible change in circumstances beyond ebbing and
flowing – and evidence free – fears around the variant.
We remain positive on prospects for 2022 but highlight that
last year only saw one 5% correction in markets, which was in
September. The fact these have historically occurred three times a
year on average suggests pauses for breath are more likely and
we have already seen falling markets and volatility in the early
weeks of 2022.
Another point we would make is that the thick end of market
euphoria remains focused around technology stocks. Over the
last decade or so, overall ‘equity’ performance has increasingly
been driven by a handful of US large-cap growth stocks, with
the five current largest names in the S&P 500 (Apple, Microsoft,
Amazon, Facebook, and
Alphabet)
contributing
around a third of overall
returns from the index over
the last five years.
Debate on whether tech
superiority can continue
will rumble on but we
suggest
a
situation
where 1% of companies
are producing 33%
of performance seems unsustainable. Across our funds, we
remain underweight US equities and expect to see broader
market performance in 2022 as the reflation trade continues.
ONGOING REFLATION TRADE
We continue to be bullish on this reflation trade as recovery
from lockdown continues and pent-up demand is released,
and are positioning for three long-term views: global ex-US
equities are more attractive than the expensive US, small caps
should outperform large, and value should outstrip growth, all
of which run contrary to what happened for most of the 2010s.
More aggressive central bank talk about policy tightening and
potential interest rate rises has driven a rotation back into the
value end of the market, after a pause over summer, and we feel
many of these companies remain very cheap.
GROWTH TO PLATEAU IN MID PART OF CYCLE?
Our view for 2022 is that while interest rate
hikes and tapering of asset purchases might
feel concerning in the short term, they
are ultimately a positive signal that
the global economy is starting to
reach escape velocity from the
pandemic – although Omicron
brings a fresh sense of uncertainty. Putting that aside for
now, we have come faster to the current mid-cycle point than
expected, in 18 months rather than the more typical four or
five years, but no one should be surprised to see such an
accelerated cycle given the unprecedented levels of monetary
and fiscal stimulus used to keep the world functioning amid
the pandemic.
2020
2022 (Estimated)
World
-3.4
6.1
4.5
G20
-3.1
6.1
4.8
Euro Area
France
2.3
Italy
United Kingdom
4.1
5.9
-4.6
-9.8
USA
India
4.6
2.9
-8.9
Japan
4.0
6.3
-4.9
2.1
2.5
5.2
6.7
-3.4
-7.3
5.8
8.5
-8.0
Germany
4.6
5.3
-6.5
China
% GDP
growth
2021
3.9
6.0
9.7
7.9
Source: OECD, 2021. OCD Economic Outlook, Statistics and Projections.
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