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Market Insights – January 31, 2022

Each week, our Investment team shares its market views with you !

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2022.01.31-point-des-marches-piguet-galland-investissements

Essentials

US stock markets suffered their worst January since 2009. As a result, we are now less underweight on the region and have increased our exposure to US equities. Sentiment indicators are extremely low, which could trigger a short-term rebound that we’d like to take advantage of. We have upped our exposure to US equities by 1% for our Balanced profile and by 2% for our Dynamic profile. 

Chinese stocks, which withstood the January market correction relatively well, lost some of their gains before the market closed for the Lunar New Year. While the uptick in economic activity remained moderate in January, measures aimed at stabilising growth should be ramped up again once the festivities have ended and the Winter Olympics get under way later this week. 

Alternative funds proved resilient during the January market correction, losing less than 2% over the month. This is due to their more defensive stance and limited exposure to growth stocks.

Europe - towards a more sustainable recovery

In the end, fears about the spread of the Omicron variant, about new restrictions being brought in and about soaring gas prices quickly faded. Investors instead focused on the post-COVID recovery, which should begin as winter turns to spring. Europe’s fundamentals, which are still a couple of months behind those of the US, remain robust. Manufacturing orderbooks are full and inventories are low, suggesting that those inventories will soon need to be rebuilt.

Consumer spending will be buoyed by pent-up demand, and people will begin spending more on services (particularly travel and leisure), which could take over from consumer goods. Household savings are still high, which is no longer the case in the US. And unlike after the 2008 financial crisis, this time around governments have adopted expansionary fiscal policies.

One example is the NextGenerationEU programme, a massive EU-wide recovery plan rolled out six months ago; it will have a lasting positive impact, particularly in peripheral countries, and make eurozone growth more sustainable. In this regard, Italy’s presidential election had the best possible outcome, both in terms of political stability in the country and across Europe and for the region’s financial markets.

The current president’s surprise re-election means that Mario Draghi will stay on as prime minister, which reduces the risk of an early election. All in all, the ECB should keep its accommodative monetary policy in place for longer than the Fed.  European stock markets rebounded sharply in 2021 but still have some catching up to do. Multiples fell when earnings rose steeply in 2021, which means that European shares are now attractively priced, particularly relative to their US peers.

Financials and industrials are predominant in European indexes, making these markets less vulnerable to rising yields. One last point in favour of European stocks is that they make up just a small proportion of current asset allocations – global alternative funds’ total exposure to this market is very low. In the current climate, we continue to prefer cyclical and value stocks and are keeping our portfolio balanced.

Currencies – will yields or surpluses get the upper hand?

The US dollar gained ground against most other currencies in 2021. And the Fed has made a head start on tightening its monetary policy, which could mean that the US dollar will continue on this uptrend. The Fed has begun tapering its asset purchase programme and is expected to begin raising rates in the spring, well before its peers in Europe, with the exception of the Bank of England.

The widening interest-rate spread between the US and the rest of the world should bring more investors – particularly European investors looking for yields – to the US capital markets. And a stronger US dollar could help the Fed in its efforts to tame inflation.

However, the United States’ massive trade deficit might hold the dollar back, particularly against the currencies of countries and regions that are running a significant surplus. That is the case for China. Barring a sharp slowdown in Chinese growth, we expect the yuan to again be one of the strongest currencies this year. The same goes for the Swiss franc: the Swiss economy proved resilient throughout the pandemic and has adapted remarkably well to the strength of the franc in recent years.

In terms of purchasing power parity, the franc is now less overvalued against the euro than it used to be. This leads us to think that when other central banks start to tighten their monetary policies, the SNB will think twice before further expanding its balance sheet through forex market interventions.

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