Weekly review 23 May 2022: Have equities become a more attractive asset class again?


What shook the US equity markets last week?

Last week, the equity markets experienced volatility when recession fears raised their heads once again. In addition, the markets were worried that the Fed would tighten its monetary policy too quickly.

To date, the markets have assumed that consumers would have assets saved up after the pandemic, which would buffer the price rally. However, now it seems that companies are unable to raise their prices at the pace that the markets had assumed. For example, US retail companies commented last week on weakening EBIT margins resulting from growing cost pressure. Consumer sector companies have also communicated softer demand although retail has grown strongly so far.

Which markets and stocks have performed best?

The United States was among the weakest equity markets last week. Over the past six months, there have not been any significant regional differences in stock price performance on the markets.

The more stable sectors such as utilities, health care and consumer staples have been the best sectors in recent weeks. The best performing sector this year has been energy, which has continued to be strong in recent weeks too. Energy’s rise has, however, levelled out from the sharp upsurge early on in the year. As interest rates rise, the performance of growth companies has become weaker.

Factor-wise, the more defensive factors have overperformed, while growth companies and small caps have underperformed.

Have equities become a more attractive asset class again?

Due to the stock market movements at the start of the year, a clear change has occurred in the valuation levels of companies. The equity markets no longer look expensive historically speaking, provided that earnings forecasts hold true.

In the USA, valuation factors are still slightly elevated historically speaking, but Europe and the emerging markets are at their historical averages, and these markets can no longer be classified as particularly expensive. If, however, the expected earnings growth fails to materialise, the situation will naturally change.

Why did the interest rate level fall slightly last week?

Earlier, the markets have priced in the tightening of central bank policy and thus the rise in interest rates. Then again, if the economy were to slide into a downturn, the central banks’ need to dramatically tighten their monetary policy would decline, slowing the rise in interest rates. This is why the interest rate level fell slightly last week on the back of concerns over a downturn.

Why have corporate bond spreads widened further? And what is depressing fixed income investment returns?

Corporate bond spreads have widened further and now clearly exceed 2018 levels.

Typically, corporate bond spreads widen when the equity markets are nervous. In addition, in the background are concerns over a downturn at the same time as the still-high inflation is forcing central banks to continue their rapid tightening of monetary policy. In a downturn, credit risk events increase. The markets have now begun to price in this eventuality.

The rise in interest rates and widening of spreads have pushed fixed income investment returns down. Investments with a long duration and risky asset classes such as high yield and emerging market debt have fallen the most. The appreciation of the dollar has reflected positively on euro-denominated returns with regard to fixed income investments quoted in dollars.

Are there any signs of inflation subsiding yet?

Last week we received the latest, i.e. April’s, inflation figures from Europe. Inflation had not accelerated further from March’s figures, remaining at 7.4%. It is worth noting that the energy price made up a marginally smaller share of total inflation than in March. Similar development took place in the USA.

Inflation is now showing signs of levelling out, but also signs of lingering. While the change in the prices of goods resulting from the increase in energy and raw material prices has been a key factor in the acceleration of inflation, the contribution of energy and goods is beginning to taper off. Inflation is now being maintained by issues further along the value chain, especially services. A lot of workforce is required to produce services, which means that wage inflation impacts this component of inflation in particular. These factors are also more persistent and it would appear that inflation is not going anywhere any time soon. In terms of this, inflation development is further along in the USA than in Europe, but the same trends can be detected in the euro zone’s economy.

China has implemented severe Covid measures recently. How have the measures impacted China’s economy?

China’s Covid policy is weakening economic figures. In April, retail sales fell -11.1% year-on-year and industrial production -2.9%.

The figures are also impacted by China’s zero tolerance in terms of Covid-19, with the fight against the virus resulting in lockdowns of cities and the closure of production plants. However, when comparing figures, it is important to remember that there were no major Covid-19 restrictions in place during the comparison period last year.

The earnings season is coming to an end. What does the earnings season look like in the USA?

The US earnings season has proven slightly better than expected. Net sales grew +13% on average and earnings growth by +9%. Q1 was a period of high inflation, which has increased net sales. The greatest contributors to earnings growth were the raw material sector, energy sector and industrials.

Banks have reported weakening results in line with expectations, resulting from weak development on the private equity markets. The weak performance of the private equity markets impacts companies’ willingness to carry out IPOs and thus the profitability of investment banking. In Q1, also lending by traditional banks has fallen somewhat in the USA.

What about in Europe?

Europe has also experienced a better than expected earnings season. The average growth in net sales has been +25% and +11% for earnings growth, which is slightly above US figures.

The contribution to earnings growth has come from more sources than in the United States. Nevertheless, the raw material sector, energy sector and industrials have played a significant role this side of the Atlantic too. Earnings growth is weighed down by the weakened results of banks and the financial sector, which was to be expected, however.


Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.

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