International Communique No. 322 – 25th of January 2022


After the thundering year of 2021, equity markets have started 2022 on a different footing. Without any particular trigger, the overbuying of certain sectoral and thematic positions observed for more than two years is now correcting itself.

Since 2009, the Fed has supported the markets through monetary policy and a raft of quantitative easing plans. These continuous injections of liquidity have benefited equity markets by supplying a constant source of inflows. Many have acknowledged the fact that the Fed – through its asset purchases – would keep rates low and indirectly provide unconditional support to stocks. This even got a name: “the Fed put”. In recent years, moderate growth stocks with less alluring profiles have massively underperformed, with many companies offering exposure to more dynamic themes. This trend remained intact regardless of the fact that the companies neglected had strong balance sheets, steady earnings and often attractive valuations. Funds flowed indiscriminately into thematic index products such as ETFs (exchange traded funds), which buy a list of stocks representative of a theme without much in the way of bottom-up analysis. In this latest bull market, guided by a mood of exuberance, a historically
high number of stocks that had never made a profit saw their share prices soar.

But the Fed does seem to have withdrawn its ‘put’. As a result, a trend of getting ‘back to basics’ since the beginning of the year have been observed. Strong stocks with low valuations are outperforming their pricey peers. Valuation differentials are narrowing back to standard readings.

Some trepidation is creeping for those awaiting news of the Fed’s decision after their January 26 meeting. Many are expecting it to offer an indication of how quickly US rates will rise in 2022.

The geopolitical tensions surrounding Ukraine and high oil prices are also weighing on the overall mood amid the more inflationary conditions. In this setting, volatility has risen into the 30% range. Gold is recovering but still not very quickly, while cryptocurrencies have taken a hit. The price of Bitcoin is down by more than 27% since the beginning of the year. So conditions are more turbulent but the focus is firmly back on value and fundamentals. Some good opportunities may also be anticipated, which may take the form either of premium income or, where called for, the construction of direct positions in blue-chip securities.

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