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Market Insights – March 13, 2022

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

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Essentials

In January, retail sales in the eurozone grew by only 0.2%, falling short of the 1.3% forecast, with consumers no doubt starting to feel the pinch from surging oil and food prices. Year on year, retail sales were up 7.8%. 

Nickel has become the latest commodity to fall victim to the war in Ukraine. An epic short squeeze turned an initial jump in nickel prices into a 300% rise before trading was halted on 8 March. The London Metal Exchange is now scrambling to resolve the situation before it can reopen the market.

Investors have once again been panicking about US-listed Chinese companies. The US regulator’s run-of-the-mill announcement about a potential delisting triggered a sharp correction on the markets, already rattled by the war in Ukraine and lockdowns in several major cities in China. As a reminder, delisting stocks that are also listed in Hong Kong is expected to have a limited impact and won’t happen until 2024 at the earliest.

Is Christine Lagarde inspired by Trichet rather than Draghi?

The uncertainty surrounding the war in Ukraine has not yet had a significant impact on major central banks. It’s true that they are exercising caution when talking about the impact on economic growth. All major central banks have acknowledged that the war has considerably dampened the prospects for the global economy – but not enough to throw their monetary policy normalisation off course. The US Federal Reserve (Fed) looks set to carry out a first rate hike at its meeting this week. Out of caution, the Fed is likely to raise rates by just 0.25%, rather than the 0.50% expected a few weeks ago. But further hikes are still forecast over the coming months. Despite the dire geopolitical context, it makes sense to tighten lending conditions given the surge in US inflation – the risk of a wage-price spiral in the States hasn’t been this high for decades. Turning to the European Central Bank (ECB), however, we are puzzled by the rather severe tone it adopted last week. ECB President Christine Lagarde clearly signalled the possibility of a rate hike before the end of the year, despite the risks looming over the region’s economy. After all, a protracted war in Ukraine would weigh on both business and consumer confidence. And if the geopolitical climate worsens – for instance, if Russian gas stops flowing into Europe – this could increase the risk of recession. This is yet another sign that the ECB is struggling with the shackles of a policy that prioritises fighting inflation over all else. It’s hard not to think back to the summer of 2008, when Jean-Claude Trichet, the then-president of the ECB, raised rates in the midst of the financial crisis in an attempt to rein in inflation caused by a surge in oil prices. While we will be keeping an eye out for any progress on the diplomatic front, we nevertheless still think that it is worth taking a more cautious stance on equities, given that central banks are tightening monetary policy, energy prices are soaring and geopolitical tensions have increased the economic risks.

 

 

Switzerland – focus on defensives

Last week we announced that we were reducing our exposure to equities. Yet the Swiss market is one of the only ones that we are still overweighting in our asset allocation grids.

Domestic indexes have proved resilient in this period of geopolitical uncertainty. Since the start of the Ukraine conflict on 24 February, the SPI index has done much better than the Euro Stoxx 50 in Swiss franc terms, losing just 2.5% versus more than 8% for the eurozone’s blue chip index. The Swiss market has fulfilled its role as a safe haven during this flight to quality. Investors have also been rewarded by the strength of the franc against the euro.

There is little visibility in the short term – the war in Ukraine looks set to last for many more weeks, which will prolong market volatility and continue to boost Swiss stocks. Blue chips, which tend to be more defensive, are faring particularly well. In the short term, we are focusing on defensive large caps, which offer the visibility and stability needed to weather the current market storm. However, small caps shouldn’t be completely cast aside. They may be struggling at the moment, but they should continue to be buoyed by the robust global economy in the longer term.

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