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2022: A tough start
The new year has not started very well, especially for some asset classes.
Let’s start with the main character: the Treasury!
In the first days of the year, the 10-Year Treasury Yield rose sharply, going from 1.5% to 1.75%, a very large move (25 bps).
Why this move?
On one hand, the fear about the Omicron mutation evaporated. The new variant is very contagious, but probably less severe, and vaccines are working well in preventing the rise of hospitalization.
Low hospitalization means no restrictions, which means no stimulus required.
On the other hand, the release of the last Fed minutes frightened investors: Fed members are ready to be more aggressive in removing monetary stimulus. Inflation is a source of concern and the job market is close to full employment.
Indeed markets are now pricing a more hawkish Fed, even if not aggressive as the showed in the dot-plot.
The two factors quickly sent the 10-Year Yield up, and as I have already written many times, the move impacted heavily even on stocks.
Just look at the YTD return of the equity indices:
As you can see, the impact has been large and negative on tech stocks. We are just at the beginning of the year and Nasdaq 100 is already down by more than 4% YTD, and there are many tech stocks down by more 10% YTD.
On the contrary, there are sectors performing in an excellent way: just look at financials, energy.
Where to invest now?
It is clear that the sector rotation is back, and that value stocks are now overperforming growth stocks again (as already happened in the first half of 2021).
When rates go up there are some sectors that benefit from that, and some that usually suffer.
The biggest winners usually are financials, energy, industrials, consumer cyclicals and value stocks.
For example, look at the European banks overperformance when the 10-Year Bund yield rise.
The biggest losers can be utilities, telecom, tech and growth stocks.
It is very difficult to understand how long the sector rotation can last: sometimes it lasts a few days, other times a few months.
In the first days of the year rotation has been strong, but I think it has more room to go, especially because inflation can still be a source of concern for investors that will reasonably stay long on cyclical stocks, as a protection against a more aggressive FED.
On the other hand I think that inflation will peak in the first half of the year, and central banks will not be so hawkish as many now believe. In any case it is likely that we will see nervous markets for the next weeks, but I am not really scared. The outlook seems still positive for equities and good buy opportunities will come.
I remain overweight on stocks, but I suggest to have a diversified portfolio, balanced between different sectors and exposed to different geographic areas.
I still see financials and energy as the two most interesting sectors, but the recent sell-off created good entry points on some tech large cap. If you are looking to invest for the long term, you could start to make some purchases on tech giants.
I would hold just a very small percentage of pure growth stocks: if rates will rise more, the fall will continue. Don’t put all your money in stocks that are currently priced 20x their expected revenue!
Looking at geographic diversification I think that Europe can perform very good in the current market environment, and UK can be the surprise of the first part of the year.
Currently UK stocks are trading at huge discount, compared to the rest of Europe and US. It looks like an interesting bet in order to diversify the portfolio and to benefit from the value rotation.
Moreover I am underweight on bonds, especially US government bonds. The recent Treasury sell-off doesn’t look over. Currently I am not buying any financial instruments related to bonds.
Finally, the earnings season is starting on Friday. Stay ready for some big swing!
Remember: this is not a financial advice! Make your analysis before to make any investment!
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Have a great week!
Market Radar
Disclaimer: Market Radar is not an investment advisor. Any information provided as part of the services is impersonal and not specific to any person’s investment needs. You acknowledge and agree that no content published or otherwise provided as part of any service constitutes a personalized recommendation or advice regarding the suitability of, or advisability of investing in, purchasing or selling any particular investment, security, portfolio, commodity, transaction or investment strategy.