The economy: lower growth
- Central banks toughen their rhetoric and announce their priority to reduce inflation.
- Fears of a substantial reduction in growth spread, presiding over the forum in Davos.
- Inflation may have already peaked. Several sources confirm that 3- and 5-year inflation forecasts in the US are moderate.
- The prolongation of the war in Ukraine continues to put pressure on energy and food prices and, consequently, inflation across Europe.
- The strict confinement imposed by the Chinese government will result in stimulus measures.
- With regard to energy, transitioning to an economy with a smaller CO2 footprint will take time and money, and will likely require a realistic revision to avoid supply problems.
Markets: recession fears
- In May, US tech shares declined sharply, dragging down the S&P 500 and European tech shares. At the end of the month, however, considerable rebounds were posted to close May with no major changes (Table 1).
- The different make-up of US and European indices conceals the fact that, with the exception of energy and commodities (US) and/or telecom (EU), other sectors have posted declines since the beginning of the year.
- In recent weeks, the debt market has reduced losses somewhat, becoming a haven against lower economic growth: the opposite of a few months ago.
- Losses have finally reached both IG and HY corporate bonds, which widened spreads relative to public debt (Table 2) but, for the moment, default rates remain very low.
Investment policy: opportunities for long-term investment
- A recession in the US is possible, but far from certain. However, recession fears loom over investors, triggering massive sell-offs that spread to all stock markets.
- Declining share prices among top quality companies whose earnings-per-share continue to grow is a contradiction that cannot last forever. Ultimately, fundamentals will prevail, once the emotion subsides.
- Due to sell-offs among pessimists, share prices are far removed from the value that we assign to most of the companies in which we invest. Consequently, their valuations (P/E ratios) are compressed and, in many cases, below the 5- and 10-year average.
- Among financial assets, shares best protect against persistent inflation, which we hope will be present—though moderate—in the coming years. Because we have not changed our opinion in this respect, shares continue to feature prominently in our portfolios.
- If H1’22 earnings reports are consistent with our estimates, there will be a major opportunity for long-term investors in H2’22, since...
- …we doubt the central banks will lead economies into a recession by tightening monetary policy, considering that governments owe huge volumes of public debt, the repayment of which will experience growth and inflation. This is what happened in the wake of the Second World War.
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