January Issue 2022
25/02/2022
Summary
After a period of festive excess, January typically encourages sober reflection and a focus on the year ahead. Global equity markets have fully embraced this in 2022, pulling back 4.9%. Sustained inflation is driving central banks to tighten monetary policy at the same time as some companies are managing down near-term growth expectations.
Equity Snapshot
| United States | • | US bonds fell steeply in January as surging inflation saw investors starting to price in a larger number of rate hikes in 2022 and 2023. The yield curve flattened further as short-dated yields rose more than those for longer-dated bonds. The yield on the two-year note briefly rose back above 1.2%, a level last seen in February 2020, while the 10-year bond yield neared a two-year high of 1.9%, before closing the month around 1.8%. In contrast to recent months, inflation-linked bonds underperformed nominal Treasuries as real yields moved higher over the month. |
| • | Following January’s FOMC meeting Federal Reserve chair Jay Powell refused to rule out a more aggressive pace of interest rate hikes and all but confirmed the first increase would be implemented in March. Noting that inflation was well above the Fed’s 2% target, Mr Powell suggested that there was “quite a bit of room” to tighten monetary policy without harming the labour market. | |
| Europe | • | European bonds fell in January as surging inflation saw investors starting to price in a larger number of rate hikes in 2022 and 2023. The yield on the 10-year German Bund briefly closed the month above zero for the first time in nearly three years. In general, peripheral euro-zone bonds outperformed core markets, especially in Italy where fears of a snap general election were allayed by the re-election of incumbent president Sergio Mattarella as head of state. |
| • | The euro-zone economy grew 0.3% in the final three months of 2021, as expansions in France, Italy and Spain offset a contraction in Germany. Overall economic activity across the euro zone slipped further in January, with services falling to a nine-month low as COVID-19 infection levels hit record highs, although manufacturing picked up to a five-month high as supply-chain disruptions eased. However, purchasing managers’ indices revealed that the average prices charged for goods and services rose at the fastest rate since records began in 2002. | |
| Asia | • | Equity markets in Asia retreated over January as risk assets sold off after the US Federal Reserve indicated it may need to accelerate the pace of its planned rate hikes. Surging COVID-19 cases, both regionally and locally, also undermined sentiment, while the stronger US dollar was a further headwind to performance across the region. China equities saw a weak start to the new year, although Hong Kong stocks bucked the trend to deliver positive returns for the month, as a number of heavyweight constituents in previously beaten down sectors, such as internet / ecommerce, recovered slightly. Elsewhere in Australia, South Korea as well as Taiwan, returns were negative. On the other hand, ASEAN markets performed better overall exceeding their more developed counterparts, helped by their lower exposure to technology companies and higher weightings to stocks in the Financials and Energy sectors. |
| Bond | • | It has been a rollercoaster ride for risk sentiment at the start of 2022 as markets anticipate changes to the reaction functions of central banks given ongoing near-term inflation concerns. Government bond markets have been on a weak footing as G10 central banks continue to signal a hawkish policy bias; meanwhile, energy prices also continued to rise on Russia/Ukraine geopolitical risks, with oil prices rising to their highest levels since 2014. The US Federal Reserve affirmed market expectations that it would likely begin hiking policy rates in March, with its current asset purchases also concluding around the same time. At the post-meeting press conference, Federal Reserve Chair Jerome Powell did not rule out the possibility of raising rates at each meeting this year and left open the possibility of a 50bp rate hike in March. Short-term interest rate markets are now pricing around five hikes by the end of 2022, with growing expectations that balance sheet run-off (quantitative tightening) may also begin in H2 2022, possibly at a pace of between USD 50–100 billion a month – a less gradual pace than during the 2017/18 run-off. The yield on the two-year note briefly rose back to around 1.18%, which was last seen in February 2020, while the 10-year bond closed the month around 1.78%. |
| • | In the euro zone, inflationary pressures continued to be elevated. Although German CPI inflation rose 4.9% y-o-y in January, the first deceleration after six consecutive gains in the yearly rate, this was largely due to an unwinding of the VAT rise that had driven up inflation rates last year. The underlying pressure on near-term inflation remained on the back of still strong goods prices – triggered by ongoing supply shortages – and the passing on of markedly higher electricity and natural gas prices by energy companies to consumers. On the political front, the Italian presidential elections dominated Italian risk sentiment. In the event, the Italian Parliament re-elected the incumbent, President Sergio Mattarella, who received large support from almost all political parties. The outcome supports near-term political stability and a continuation of the current government of national unity, with Prime Minister Mario Draghi remaining in his current role. Ten-year Italian versus German spreads ended the month 7bp tighter at 128bp. From a monetary policy perspective, the ECB has maintained a relatively less hawkish policy stance relative to market expectations and versus the Federal Reserve and Bank of England. However, the short-term interest rate market has increasingly started to price in an earlier ECB rate-hike cycle. The 10-year German Bund yield briefly closed the month above zero for the first time in nearly three years. | |
| Outlook | • | After a period of festive excess, January typically encourages sober reflection and a focus on the year ahead. Global equity markets have fully embraced this in 2022, pulling back 4.9%. Sustained inflation is driving central banks to tighten monetary policy at the same time as some companies are managing down near-term growth expectations. In this environment, gains in the share prices of highly cyclical names on low valuations are making for a rare bright spot. |
| • | Confirmation that Omicron – in combination with vaccination programmes – makes for a lower fatality rate is helping fuel resurgent economic demand. Combined with a reduced supply of labour, energy and raw materials, prices are rising to new heights. January saw the US record a CPI of 7%, with the UK at 5.4%, levels not seen in 40 and 30 years, respectively. For as long as this environment lasts, companies that can use it to expand their margins, particularly in classic value sectors like energy, materials and financials, will look attractive to short-term investors. By contrast, price taking manufacturers of consumer goods, particularly those reliant on commodities, will see weakness. | |
| • | Given the strategy’s tilt towards quality names with sustainable growth, such a rotation is challenging to short-term performance. The same is likely to be true of the rate hikes deployed to curb inflation. Even in Europe, where ECB President Lagarde had been maintaining an accommodative stance, markets are now pricing in four hikes in 2022. Consequently, multiples in some of the most highly valued (and for this reason not held) growth stocks like Tesla and Nvidia have compressed as long-distant future cash flows are marked down with a greater discount rate. | |
| • | A more recent concern emerging among market participants is that rate hikes are only making it onto the agenda just as growth is starting to weaken. In January, the IMF revised down its expectations for global growth from 5.1% only three months prior to 4.4% . Corporate earnings are also showing signs of moderation, with many companies either lapping the pronounced base effects of 2020, or struggling to repeat the phenomenal growth they enjoyed during lockdown. | |
| • | Consequently, this earnings season is commanding investors’ attention more than most. However, investors are choosing to focus less on the ability of companies to meet or even beat expectations for the current quarter, and more on their forward looking guidance. Only companies that are able to provide a high degree of visibility around future growth profitability are being consistently rewarded. For example, in the portfolio, Visa raised its growth expectations to pre-pandemic rates and has seen its shares gain significantly. By contrast, Atlas Copco’s more conservative guidance around supply-chain issues – despite rising revenue and earnings – has weighed heavily on the shares since earnings. | |
| • | With investors so intently focused on the near-term, the market can often overreact without fully taking into account the differences between business models. It is in this environment, where sector correlations are high irrespective of fundamentals, that active management thrives. We continue to believe that investing in structural and profitable growth opportunities is the best means of compounding client wealth over the long-term. Our preference for companies with pricing power, combined with a valuation discipline that keeps us away from extremes, should ensure the fund is well positioned as the economic cycle progresses. | |
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Sources: 1 Eurostat 2 Bloomberg 3 Office for National Statistics
Information herein is based on sources we believe to be accurate and reliable as at the date it was made. We reserve the right to revise any information herein at any time without notice.
No offer or solicitation to buy or sell securities, nor investment advice or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Past performance is not indicative of future performance.
This material has not been reviewed by the SFC in Hong Kong and is published for information only.
Issued by Allianz Global Investors Asia Pacific Limited.
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February Issue 2022
30/03/2022
Summary
Almost two weeks after Russian armed forces first invaded Ukraine, the conflict continues to dominate current events. Vladimir Putin has not achieved the swift conquest he had hoped for, and Russia instead finds itself increasingly isolated, both politically and financially.