The stock market year 2021 turned out to be very pleasing on the whole! In the wake of a very strong recovery in economic activity and substantially rising corporate earnings (e.g. 2021e S&P 500: 50%, Euro STOXX 50: 57%), the aforementioned US main index gained 28.7% on a total return basis and the Eurozone benchmark 24.1%. With a total return of 43.6%, the domestic ATX - like many of its CEE counterparts - was even among the global outperformers thanks to a catch-up effect, the relatively favorable valuation and the high weighting of the financial and energy sectors.
At the beginning of the year, soaring government bond yields created headwinds and weighed on growth stocks in particular, which came under valuation pressure via a higher discount factor. Indeed, in our view, the focus this year will once again be very much on the inflation issue and the associated monetary policy stance.
Against the backdrop of robust economic activity and consumer price inflation, which has now been rising for much longer than expected (e.g. +7% yoy in U.S. CPI in December, the highest level in 40 years), more and more central banks are being forced to focus on their price stability mandate. In December, the U.S. Federal Reserve dropped its narrative of "transitory inflation," announced that it would soon stop buying new bonds and is now targeting three interest rate hikes in 2022 instead of two. Against the backdrop of the latest data and comments by the central bankers, the Fed could become even more accentuated. The ECB has also given itself more leeway for a possible initial interest rate step toward 2023. Although the necessary adjustments in the monetary policy path may occasionally become a burdening factor, we do not see the upward trend endangered by the normalization of monetary policy or rising yields/interest rates, as on the one hand a lot has already been priced in and this development is ultimately also a reflection of the overall very strong growth environment. It should also not be forgotten that companies have strong pricing power in the current environment, which is reflected in very high margins.
A continued robust economy (e.g. expectation growth Eurozone real GDP 22e +4%) and notable earnings growth rates in the range of 8 to 10% for the broad European and US equity market then also form the basis for our expectation of a continuation of the upward trend on the equity markets in 2022. We also consider it positive that an end to the pandemic is approaching due to the less dangerous "Omicron" variant. Furthermore, the equity segment remains the more attractive choice in terms of valuation compared with the still expensive bond market. In addition, we expect continued high M&A momentum and large-volume share buyback programs to support the market.
According to our expectations, the U.S. equity market should have a slight edge over Europe due to its higher profitability and the higher share of internet/tech stocks. We also expect the domestic ATX to outperform due to its attractive valuation levels and its high weight in Financials and Energy stocks.
Author:
Christian Hinterwallner
Head of Equity Research
Raiffeisen Research / Raiffeisen Bank International
13 January 2022
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.
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