After three straight years of double-digit percentage gains, equity markets started the new year with price declines. Markets are in the process of adjusting to a surprisingly rapid exit of central-bank policies from the crisis mode and the pressure for rising real yields. German 10-year yields returned to positive territory for the first time since 2019. Inflation has risen sharply. Five interest rate hikes from the Federal Reserve in the USA are expected in 2022. This uncertainty led to profit-taking in equity markets. After such strong performance over the past three years, a decline in equity markets is not a surprise. For the S&P 500 Index, January 2022 was the worst month since the bull market began in March 2020. Ambitiously valued technology stocks tumbled particularly. In view of inflation and rising interest rates, a rotation from interest rate sensitive growth stocks to defensive blue chips is evident.
The reporting season for the fourth quarter of 2021, which began in the USA in Mid-January, is more encouraging. Average earnings for the S&P 500 companies came in 16% better than in the third quarter of 2019 before the pandemic. Measured against the latest comparable phases corporate earnings have recovered faster and stronger in 2021. Consensus expects net profits to grow by around 10% in 2022.
In terms of regional performance, European and Emerging Markets equities outperformed the general market year-to-date. The same applies to the Vienna Stock Exchange, which was less affected by market turbulence. This is due to the high cyclical composition of the market. Financial and energy stocks have a larger exposure and benefit from high inflation and rising interest rates.
As long as the economic phase "recovery" holds, interest rates merely rise to a neutral level and oil price shock fails to materialize (Brent oil hits USD 90 due to the Ukraine crisis), the environment continues to be constructive for equities, even though price movements are likely to remain volatile.
Author:
Gabriela Tinti, CPM
Head of Desk Equities AT
Erste Asset Management
2 February 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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