2021 is over, equity rally is not

Market Radar

Dec 30, 2021

Hello guys,

I hope you are all fine and having good time.

I have been out of office for Christmas holidays, but here I am again to show you my current point of view on markets.

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Let’s see the latest market events!

Seasonality: Santa rally is here?

The days between Christmas and the beginning of the new year are usually one of the best moment of the year, as you can see in the chart below:

Indeed this year equity markets are proving to be in good shape and most of the principal stock indices are closing the year upward.

Source: Market Radar on Bloomberg. Data as of 28 December

There are two geographical areas that performed best during the year: U.S. and Europe.

The S&P 500 is up by more than 27%, while the Stoxx Europe 600 returned a positive 22.3% so far.

Moreover, among the single European countries, there have been winners and losers:

Source: Market Radar on Bloomberg. Returns in local currency

For sure, this has not been the year of Asia, especially for China, Japan and South Korea. All the main equity indices performed poorly. India has been one of the few exceptions: the Nifty 50 is up 23% YTD.

Are global equities up only thanks to few stocks?

If you look at the charts above you would say that everything is great and market is very healthy, especially in U.S., but maybe things are not like that.

Just look at the chart here above. Global equities (MSCI ACWI) is close to the its all-time high, but almost half of the countries included in the index are below the 50-day moving average. This is a signal of very low partecipation to the rally from many global regions.

Remember that U.S. weighs almost 60% in the MSCI ACWI index, and it is probably the main reason behind the sustained price. Even in U.S. there is a not-really clear situation: S&P 500 just reached new highs , but only 70% of the stocks is above the 200-day Moving average.

So the index is going up, but lot of members are going down. How is that possible? Because of concentration.

Few stocks are leading the S&P 500, and the S&P 500 is driving up the MSCI ACWI. Markets are probably weaker than they look.

Omicron? Fear or no fear?

Omicron variant is surely the most discussed theme right now. The new mutation is quickly becoming predominant and the new cases are everywhere going up vertically.

On the other side, the hospitalization rate and the number of ICU patients are lower compared to last winter. See the chart below:

The first impression is that even if case are more than doubled, and there are almost no restrictions, the ICU patients are almost half of last year. UK is the most interesting case study: ICUs are declining despite record new cases. UK is even the country making more vaccine boosters among the ones here showed.

Probably there is a double reason behind these numbers: Omicron seems more contagious and less severe, and vaccine are making their jobs in reducing worst cases.

Markets are currently discounting no additional restrictions and that the main economies will remain open. I think that markets are right and governments have the instruments to manage well the new virus wave, but it is always better to check data costantly. Things can change quickly, and markets can react fastly.

Where to invest now?

I really don’t like to make forecasts for the new year, even because it’s very easy to be wrong.

In any case let’s see strategist forecasts for 2022.

Right now they see lot of upside for Asian equities, and lower growth for U.S. and Europe. Does this mean that you have to revolutionize your equity exposure? Not in my opinion!

I currently see US and Europe as the best performers and their trends look still good and intact. In case of no further restrictions, there could even be lot of interesting buy opportunities on single stocks, that lagged the index this year. Some example?

I will list some name with an interesting setup that deserve a deeper analysis.

In the payment sector I see good entry points in stocks like Paypal, Visa, Fiserv.

Other notable tech names, that recently underperformed, but that have a solid growth and an appealing valuation are Meta Platform and Salesforce.

If you are looking for something more cyclicals give a look at Caterpillar, or Bank of America.

Rememeber that the stocks above mentioned are just ideas, not a financial advice. Make your own analysis before to make any investment.

Moreover, if you don’t want to buy single stocks, you can easy go on ETFs: I see S&P 500 and Dow Jones better than Nasdaq right now (mainly because of less Covid risk and a return to cyclical rotation), and Stoxx Europe 600, FTSE MIB and CAC (both plenty of cyclicals too) as the most appealing indices in Europe.

After the positive rally in December don’t be surprised if there is a pause in the coming weeks, but I would use any weakness to accumulate more.

What about Asia? Valuations are very low, especially in China, but there are still no clear signals of inversion. In China, the real estate crisis and the government actions against tech companies are issues not resolved yet.

If you look at the long term this could be a good entry point on China, but you have to be patient: gain will probably require time to materialize.

Remember: this is not a financial advice! Make your analysis before to make any investment!

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It will be a subscription service. Let me know if you have any suggestion or if you can be interested.

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