Markets shift into new regime
With the US economy and global markets facing aggressive interest rate hikes, markets have moved into a new regime, whereby value investing has taken over from a pure growth approach, according to VanEck.
Arian Neiron, VanEck's chief executive and managing director Asia Pacific, said volatility was likely to be the dominant feature of 2022 as the US Federal Reserve and other central banks raise rates to curb inflation.
“With bond yields jumping, growth stocks have dropped sharply and value shares have outperformed, as financial markets adjust to higher risk-free rates,” Neiron said.
The S&P/ASX 200 had fallen 6.4% over the month to 31 January compared to 2.3% for the S&P 500 and 5.7% for the Nasdaq Composite Index showing that Australian shares had underperformed compared to the US.
“BHP, which is up 11.7% over the month, and Rio Tinto, which is up 4%, helped to minimise the falls from the likes of Afterpay (now Block) which is down 28.6%,” Neiron said.
But speculative companies were hit disproportionately harder, he said.
“Even in Australia, we are seeing the Buy Now Pay Later sector, for example, fall rapidly, with Zip down 27%,” Neiron said.
“We are seeing a new regime in equity markets, whereby investors, in the months ahead, increasingly focus on fundamentals and buy companies in strong financial health which are able to withstand rising inflation.
“These companies are more likely to withstand the margin erosion that comes from inflation than companies that aren’t producing strong free cash flow and importantly profit.
“For the short term, we favour value as a factor, which we believe is poised to do well and quality for core long-term investment exposures. During times of inflation, profitable companies outperform as companies with earnings can boost profit margins by raising prices.”
Neiron said the relative fortunes of emerging markets may improve this year.
“Emerging market equities are trading at a significant discount with the MSCI Asia Pacific now trading at a 65% discount to the S&P 500 or the largest since the crisis in 1998. Emerging markets currently benefit from more robust external surpluses, FX reserves and in some cases a significant buffer in real interest rates above developed markets.”
“With fixed income allocations, the challenge and hurdles are more pronounced. Credit spreads are narrow with little margin for error. Yield curves steepening doesn’t bode well for fixed rate exposures.
We are seeing our clients opt for floating rate exposures and a preference to hedge out interest rate risk. Selectivity is key here,” said Neiron.
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