The second year characterized by the Covid-Sars 2 pandemic ended with a particularly favorable trend for the majority of stock indices, unlike that of the previous year, which had been characterized by the outbreak of the virus.
The stock exchanges of developed countries recorded double-digit gains, between 15% and 30%, while the emerging markets, especially in Asia, were particularly disappointing in their underperformance, as in the case of the Chinese market which recorded a loss of 13%. The US indices ended the year with an increase of 26.9% for the S&P 500, 18.7% for the DJI and 21.4% for the Nasdaq, while in Europe the French stock market excelled with an increase of the order of 29%, followed by Milan with 23%, Frankfurt with 16% and London with 14%. The Japanese stock market closed out the year halfway between the negative Chinese result and the strong western gains with a limited increase of 6%.
These results are certainly a function of the conviction on the part of international investors that economic growth would normalize, gradually returning to the pre-Covid level, but the prerequisite for financing equity demand remains the level of liquidity of the central banks, which is the dominant component of global liquidity. The New Year begins with divergent intentions on the part of the three main global central banks, with the Fed has already announced that it will moderately reduce its balance sheet and gradually raise the cost of money, the ECB intends to practice a neutral monetary policy and the PBOC which instead uses monetary policy as a function of exchange rate stability. With these premises, there should be an increase in the volatility of equity indices, with the central banks grappling with the dilemma of whether to support the economy with an accommodating strategy or whether to worry about the upsurge in inflation by implementing a restrictive approach.
The most recent indications seem to lean towards the first hypothesis, given that the Governor of the Fed, Powell, in mid-December, declared that although the rate of inflation has exceeded the real 2% threshold, it is appropriate to keep the base rate between 0% and 0.25% to reach the goal of full employment. So, in the US we could see a phenomenon that already occurred in the 1970s, with the predominance of fiscal policy over monetary policy, where the latter is reduced to financing the increase in public spending with negative effects on the external parity of the dollar. Moreover, with a global debt of 350 trillion dollars that requires the availability of 70 trillion dollars annually to service the debt and refinance its maturities, it is difficult to think of a significant reduction in the liquidity of central banks, quantifiable in 30 trillion dollars compared to 20 in February 2020, before Covid. The stock markets that function as a reliable mechanism for discounting future economic trends, with the gains in recent weeks seem to indicate that there will be no drastic changes in prospective monetary policies, which would expose the normalization process of the world economy, and stock prices, to a serious risk. From a tactical point of view, the umpteenth, marked, correction of the stock market sectors most sensitive to the resurgence of the pandemic, seems to offer a valid short-term investment opportunity, in the sense that it is evident that the Omicron variant now predominant, has a lesser health impact than previous variants, not justifying, in many cases, the depressed prices of securities in the tourism and leisure sectors. Therefore, a careful analysis of the prospects of the various stock market sectors, aimed at determining the rotation of demand, remains fundamental this year as well, as has been the case since the equity market recovery which began in spring 2020. From this perspective, a reduction of the technology sector could be considered which, has driven indices, especially in the US, since last autumn, while high dividend stocks and medium-term bond issues up to 5yr maturity, have returned to the fore after a period of apathy due to inflationary fears.
Nicola Bravetti Data Source: Bloomberg
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