The turn of the year has been somewhat febrile in global equity markets.
Immediately following New Year’s Day, the bond markets started to fall, lifting the US ten-year yield to 1.75%, a level not seen since pre-COVID in January 2020. The talk is no longer whether the Federal Reserve will raise rates in 2022 but how many times? The German Bund is the last hold-out of negative ten-year rates in the eurozone while the UK ten-year is back up to 1.2%. This move, combined with more overt inflation caution from the Fed, served to undermine an already nervous NASDAQ Index, which has fallen around 7% over the first ten days of 2022.
As we observed last month, there had been a change in the mood in some of the more heroically valued NASDAQ stocks over the latter half of 2021, which was beginning to affect the broader market for growth stocks. Bouts of weakness in the NASDAQ in 2021 did coincide with periods of (modestly) higher interest rates and this has been underscored over the past two weeks. This is rational for companies valued on the basis of hoped-for future earnings (those earnings need to be discounted at higher interest rates), it is less rational for those technology companies which have already demonstrated their earnings power.
Over this particular four weeks, the headline indices are little changed in the US, while those markets with a greater weighting in cyclical companies, notably banks and energy companies, such as the UK, have actually moved ahead. The banks have led the way (they welcome higher interest rates and the chance to earn more from their NIM), Barclays, HSBC, Société Générale, Standard Chartered and Banco Santander all gained by mid-teens percentages. US banks also gained, but less dramatically. Big oil saw gains of 11% for Exon Mobil and 9% for Royal Dutch Shell, while the miners saw a strong start to the year for Anglo American and Rio Tinto.
Also seeing a strong start were a number of the motor companies, all three of the big Japanese names rose, Honda, Nissan and Toyota up 10%-15%. The German motor companies were little changed but in the US, Ford Motor rose again. Consumer staples were quite mixed, gains for the tobacco stocks, notably Philip Morris up 9%, but the spirits companies, Diageo and Pernod Ricard, slipped back, being viewed as ‘growth’ stocks. An update from Nike reported strong sales but a dull outlook with continuing supply chain pressures, their stock fell 9%.
Pharmaceuticals were generally better, led by a 10% gain for Novartis following the announcement of a buy-back of up to $15 billion of stock. A good year for Novo Nordisk was marred by a late-December setback as they reported that they too had been hit with supply chain problems, their stock fell 10% over this period. Similarly, the industrials were generally better, led by a 10% gain for Caterpillar but Japan’s Keyence Corp has sunk 14% over this period in the dash out of ‘growth’.
The pain has mostly been felt in the technology sectors and this time it has extended across to the big companies. Adobe has fallen 14%, not helped by a disappointing sales outlook statement in December, Salesforce fell 10% on similar concerns, Alphabet slipped 4%, as did Amazon and Microsoft. Apple did briefly achieve a $3 trillion valuation, before succumbing to the general weakness.
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