The economy: uncertainty reigns
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The invasion of Ukraine has added an additional element of uncertainty and concern to the start of the year.
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Post-Omicron economic growth appears healthy…
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…with the exception of the adverse effect of the Russia-Ukraine crisis, which puts pressure on energy prices, especially in a Europe that is heavily dependent on Russian gas.
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Year-on-year inflation is reaching new highs, but should ease throughout the year, the war in Ukraine permitting.
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Markets expect that by late March, the Federal Reserve will begin to withdraw bond purchases and gradually increase interest rates. Pressure on the ECB to act has subsided somewhat.
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Rounding out the catalogue of uncertainties is the fact that the central banks could moderate the restrictive monetary policy slated for implementation in an effort to avert further problems.
Markets: volatility, the result of uncertainty
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February saw the continued sell-off of government debt, whose yields rose (see graph) as investors aimed to protect themselves from impending inflation. However, in the last few days of the month, the purchase of government debt rebounded as a haven, in response to the Russia-Ukraine crisis.
- February was a substandard month for equities, following the January rally: the last week of the month was one of the most volatile in recent memory.
- It is worth noting:
- As is often the case, punishment has been indiscriminate, without taking quality criteria into account.
- The tech sector has suffered the most intense declines.
- Relatively speaking, emerging markets have performed well, particularly Latin America, on the rise of commodity prices.
- The collapse of the Russian stock market and bond prices.
Investment policy: valuations (P/E ratio) tumble, but not profits
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For some time, we have been warning our clients of a shift in the economic and socio-political scenario, creating a tougher environment, to which companies and investors must acclimate. The Russia-Ukraine war is one example.
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Since early 2022, equity and bond markets have fluctuated nonstop in a reflection of changing expectations on: (1) inflation; (2) growth; (3) monetary policy, and now (4) geopolitics.
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This uncertain environment prompts concern among investors who, in the recent past, obtained high returns despite weathering the economic and health crises. This is especially true in certain geographic areas (USA) and market segments (technology).
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Based on the most recent earnings reports, we can reaffirm our conviction that the selection of quality shares included in the portfolios will register elevated profit (EPS) growth. The war in Ukraine may moderate, but not alter, that opinion.
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As such, the declining valuations of recent weeks, as unpleasant as they are, do not jeopardise a favourable long-term view. We are confident that, if the Ukraine crisis does not escalate further, valuations will recover.
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With regard to the client portfolios currently under construction, we have used the last week to invest in companies of exceptional quality that have received unjustified punishment.
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We remain confident in the fact that a selection of extraordinary companies is a growing repository of value. It is worth remembering that fear is the gift that fearful investors give to long-term investors.
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