“The economy no longer needs sustained monetary policy support.”
Fed Chairman Jerome Powell
The ASX 200 declined more than 6% in January, its worst start to the year since 2008. Since the nadir of equity prices in March 2020, risk assets have been driven higher by an abundance of liquidity and stimulus. Global economies have flourished, and corporate earnings have rebounded supporting record equity prices.
Yet the ‘whatever it takes’ policy response combined with the idiosyncratic nature of the pandemic dislocating supply chains has ushered in an era of structural imbalances prompting inflation to rise to its highest levels in decades.
The fear that inflation may not be under control has led to a sharp pivot by central banks acknowledging they are now ‘behind the curve’. The prospect that interest rates and bond yields will rise and there will be less of a stimulus impulse saw global equity markets decline sharply in January.
The sell-off in equity markets highlighted the vulnerability of highly valued companies (growth stocks) but also sectors, such as healthcare, where the provision of services has been disrupted by the omicron variant.
At a portfolio level, value was a clear outperformer in January. The outperformance was driven by gains in energy and material stocks, with BHP and Santos the standout contributors. Whereas, declines were most evident in consumer staples and healthcare, with CSL/Healius and Wesfarmers weighing on performance.
We contend that higher bond yields and the wide valuation dispersion that still exists between growth and value will continue to weigh on the most expensive stocks. However, we remain sanguine that healthcare sector should show signs of recovery as the impact of the omicron virus fades and the backlog of treating patients resumes.
Moreover, the recent de-rating in the consumer staples stocks impacted by significant disruptions in supply chains from the Omicron variant are now appearing to ease. Higher food inflation should also support both earnings and the PE ratios of supermarkets.
For 2022, equity markets face the dual headwind of tightening financial conditions and slowing earnings momentum. The sell-off in global equity markets in January reflected these concerns. Indeed, we expect further volatility in the coming months as investors adjust to a new paradigm. Nonetheless, global economies continue to enjoy strong growth and corporate earnings are expected to trend higher again in 2022, albeit at a more moderate level. Our portfolios are focused on ‘Quality Companies’ with strong balance sheets that remain well placed to deliver dependable dividends to our investors.
