Blog: You, us, everyone

The first half of 2022 has brought to the surface a new set of risks, and the market has in turn adjusted for this. The economic slowdown is now well priced-in, while persistent inflation, some new pandemic spikes, supply chain constraints, and the conflict in Eastern Europe will continue to make headlines.

We expect that the market will remain highly erratic based on global economic activity which is sharply down and hard to predict with all external factors appearing at the same time.  

When it comes to inflation, we expect that it will peak mid-year, but given the uncertainties on the commodities supply side, it will stay high. Supply chain frictions and higher labor wages cannot be omitted but play less of a role this time round.

We expect that commodities prices will start to normalize within 12 months; this is about the time frame required for industries to cover for alternative supply chains.

Based on these inputs, one can expect the following economic growth figures:

 The downside risks are on everyone’s mind

According to our analyses and estimates, the majority of investors think that the odds for bear market conditions are higher than for bull market conditions. On average, investor sentiment appears to be low.

 And it is exactly this scenario which makes us optimistic. When nearly all and every indicator and measurable value is negative, the market could turn positive. While for now the upside is limited, there are numerous elements that could propel the market. Here are few of them: business confidence in Europe could be supported by a modest de-escalation in the Ukraine/Russia conflict, a supply chain improvement could reduce an enduring high level of inflation, and a return to the new normal in China would enable a restart in the world’s boiler room.

 What to expect in the second half of 2022 and beyond?

On the back of downward earnings revisions and weak PMIs, we expect that in times ahead there will be more of the same negative market. But as we go towards 2023, we expect markets to become more and more skewed positively. 

The macroeconomic sequence to be looked at includes the following: inflation is expected to broaden out and result in a demand destruction. This in turn is creating an imbalance between the offer and demand, resulting in prices to adjust lower. Finally, the commodity- and currency-market volatility will spill over into the credit market with spreads on high-yield bonds to increase further, indicating a general risk aversion.

Therefore, and based on given economic forecasts, markets have as of now the following return potentials:

Source: Reuters, IX-7 Research Forecasts

• US Global: Recent volatility in US equities isn’t unfounded. Downward earnings revisions and a weaker PMI suggest the bear market is not over yet.
• US Value Stocks: Although we continue to favor growth stories related to secular growth trends in the field of Next-Gen Connectivity, global value stocks offer a reasonable short-term opportunity. On the back of a prolonged period of higher-than-expected inflation, these companies could potentially offer value buckets providing outperformance for a given period of time.
• US Growth Stocks: Well-established mega-cap technology stocks have underperformed the broad market year-to-day. Currently, many of these technology companies – most of which are cash-rich and can endure a prolonged period of lower-than-expected revenues streams – are trading at attractive valuations. The most valuable opportunities are related to companies operating in the field of connected devices – from electric vehicles to smart-home devices and medical monitoring systems. All these enablers are still grappling with a shortage of semiconductor chips – a deficit expected to extend well into 2023. As a result, the pricing power will be relatively high.
• Europe: It is true that European stocks are cheaper, and most have a strong value bias. Yet, European equity prices do not reflect all the bad news. The average PE ratio for European equities is presently in the low double digits; in the last 15 years, that measure has dipped twice in the single digit range which was followed with a recovery. Also, as of now, while valuation ratios are attractive versus the S&P 500, they remain above average against the MSCI (ex US). 
  Pending geopolitical developments, European equity markets may continue to remain cheap. Long-term investors may consider engaging with companies in the energy and materials sectors, which should be oncoming disrupted demand-offer conditions.
• Asia ex-Japan: Because Asian governments have greater involvement in directing prices of prime products than elsewhere, inflation is perceived differently. In addition, consumer spending is still somewhat limited because of ongoing COVID restrictions. However, on the positive side, supply chain disruption is less of an issue in Asia than in Europe or the United States. While the broader region has underperformed the global market by about 30% since 2016, we nevertheless believe that Asian markets are currently a suitable opportunity for assets that don’t need to be invested in Europe or in the US.
• Credit:  Geopolitics are likely to impact credit spreads, but we do not expect this to last for a prolonged period of time. Short-term, companies still benefit from favorable financing conditions and the past powerful economic recovery. Longer-term credit risks include persistently high inflation and market volatility, which would undermine a regular market evolution, particularly for the more leveraged corporates and some emerging markets.
• Commodities: The Ukraine / Russian crisis has led to a supply shock. It is therefore no surprise that commodities have outperformed equities in recent quarters. We consider that energy and food-related commodities still have the potential for an upside.