Equities in a tug-o-war
Below is a brief update following the recent period of heightened volatility.
Next Friday, we’ll share a detailed view after our Q1-2022 Advisory Board meeting.
Below is our perspective
- The timetable for higher interest rates in the U.S. has accelerated recently, causing a sharp increase in bond yields and weakness across global equity markets, down -5% from December 2021 highs.
- The withdrawal of policy support and normalisation of interest rates, in itself, is not a bad sign. Quite the opposite, as it implies policymakers expect growth to provde resilient.
- Equities are in a tug-o-war between the tailwinds of a strong economy and the headwinds of higher interest rates. This tug-o-war has increased the divergence of performance between sectors, as shown in the chart below.
- Overall, markets have successfully absorbed similar periods of rate hikes with nothing more than short-term weakness. Investors must accept that we are transitioning into a more normal policy envrionment where -10% corrections are common.
- Economic growth beneficiaries (Energy, Financials, Materials) are outperforming low-interest-rate beneficiaries (I.T., Healthcare, CommServs), highlighting that earnings growth will be a primary driver of returns, as opposed to multiple expansion.
- Our client portfolios have weathered the recent period well. We have been building portfolio resilience to higher bond yields and inflation trhough an underweight to Fixed Interest and overweight to Alternatives, whilst maintaining a neutral allocation to Equities.
General Advice Warning: The comments do not take account of your objectives, financial situation or needs. Before acting on any general advice, you should consider if it is appropriate for you.
