Weekly Update - Equity markets: a sector rotation to relativize
Volatility is back on equity markets
The early months of 2022 brought a jump in volatility and significant corrections to equity markets, mainly triggered by the tone of central banks. These have been busily hinting that the return to normal monetary conditions will be faster than was expected at end-2021, as economies continue to grow and inflation looks set to stay high for longer than first thought. This change in monetary policy has shifted the trend in equity markets: after a decade of outperformance, Growth stocks have been the losers since the turn of the year while Value stocks have done well (cf. first graph).
Recent momentum favours Value over Growth
The sharp market correction since the start of the year has focused on Growth stocks, in particular on the new technology sector. These companies have higher valuations and have been the first casualties of market uncertainties. Also, many of them - notably those on the Nasdaq - have been more sensitive to rising rates due to the heavy debt on their balance sheet. In contrast, Value stocks have held up better in the recent slide in equity prices. These cyclical companies (banking, energy, materials, commodities) have appeared less sensitive to tighter monetary conditions and have been buoyed by the commodities boom (cf. second graph).
Recent performances may not set the tone for 2022
The current turnover between sectors will not necessarily last. For one thing, corporate earnings, including in Growth sectors, remain generally strong and continue to beat market estimates. The tech majors still enjoy sound fundamentals, healthy balance sheets and encouraging growth prospects. Sector share prices may have corrected but, for now, this has mainly been prompted by underperformances of a few specific firms and does not seem to herald an industry-wide trend. For another, the analysts’ consensus continues to anticipate favourable dynamic on earnings and dividends in 2022, after a record year in 2021.
The change in the economic environment, as crisis economic policies necessarily move back toward normal, explains resurgent volatility on equity markets. Despite this, fundamentals remain generally healthy for equities. We continue to recommend balancing positions by style and sector, with diversification looking especially attractive in the current volatile atmosphere.