The sharp rise in bond yields caused an abrupt rotation on global equity markets as investors moved from growth to value stocks. Financials and energy stocks have performed the best so far this year. Given the composition of their indexes, European equity markets have fared particularly well in this climate.
Energy prices continued on their uptrend, with Brent crude oil back at its Q4 2021 highs. Investors are very optimistic in the short term, but we remain bullish on energy over the longer term and will take any short-lived bout of weakness as a buy opportunity.
Chinese GDP growth slowed in Q4 2021 to 4.0% year on year. This is well above the consensus forecast, despite disappointing retail sales figures. The People’s Bank of China, going against the grain of the major central banks, has proactively cut several interest rates in order to cushion the impact of the economic slowdown.
The Fed holds sway in early 2022
The major central banks are about to make significant changes to their monetary policies. The US will make the first move: the US Federal Reserve (Fed) will soon wind up its asset purchase programme, used to pump large amounts of liquidity into the financial system in response to the pandemic, and should then begin raising its policy rates, potentially starting in the spring. High inflation is behind these policy changes.
Prices look set to keep rising for longer than initially expected, especially in the US, where wage gains are already threatening to trigger a second round of price increases on goods and services. That said, monetary conditions will be far from restrictive, and initial rate hikes rarely bring about the end of an economic cycle.
After the stellar growth recorded last year, the global economy is likely to lose some steam in 2022. However, the year has started off very well, with the main developed economies, particularly those in North America and Europe, now growing at a faster pace than in recent years.
But growth is expected to slow in China. While initial moves to tighten monetary policy don’t usually drag down the stock markets, they can lead to a period of heightened volatility, which could be further fuelled by other factors. At the moment, these include geopolitical factors, such as the talks under way concerning Ukraine.
Given the likely rise in volatility, in December we slightly reduced our equity allocation in portfolios and began keeping some cash on hand to seize the opportunities that will almost certainly arise.
Equities still make up a large proportion of our investment grids, however, as they offer better prospects than other financial assets such as bonds, which could be hurt by rising yields.
Chinese bonds are somewhat immune to US rate hikes, so we have added them to our more conservative investment profiles. An increasingly volatile market will also be a boon for alternative investments.
In terms of currencies, the Fed’s moves could provide another boost to the US dollar. And as the Swiss National Bank (SNB) now seems more tolerant of a stronger Swiss franc, we expect it to scale back its interventions in the forex markets.
Switzerland – an attractive market
Swiss stocks put in a very solid performance in 2021, in line with that of global equities. In Switzerland and around the world, value stocks came out on top last year as economies recovered. Investors remained upbeat, unfazed by the successive waves of COVID-19 infections across Europe.
Even though Swiss stock markets posted impressive gains in 2021, we still think they will stand out again in 2022 and outperform other markets. Swiss companies are still largely exposed to Europe, where the economic recovery is lagging behind that of other regions, particularly the United States.
What’s more, Switzerland’s GDP growth will ease off only slightly, from 4% in 2021 to 3% in 2022. Leading economic indicators, such as the purchasing managers’ index (PMI), are now higher than in all other regions.
And unlike in many other countries, inflation is still low in Switzerland, which means that the SNB can keep its highly accommodative monetary policy in place. Lastly, domestic spending is robust and unemployment is back at pre-pandemic levels.
Even though Swiss stocks are expensive in absolute terms, they are still attractive compared with global indexes. This, coupled with the solid outlook for domestic companies, could push the Swiss market to outperform this year. That’s why we are still overweight on Switzerland in our portfolios.
Author
-
Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
