Merrill forsøger at besvare de mest typiske spørgsmål, som banken får fra sine investor-kunder. Investorerne er blevet pessimistiske. 52,9 pct. af dem er blevet “bears” – dvs. bjørne og pessimister, der tror på nedture. Det er den mest pessimistiske opfattelse siden 2013. Det er f.eks. højere renter og de udenrigspolitiske spændinger og høje energipriser, der skaber pessimismen. Men Merrill mener, at virksomhedernes indtjening stadig vil være god i år – som sidste år – og banken anbefaler at satse mere på value-aktier end vækstaktier – og generelt på virksomheder og brancher med en solid indtjening, f.eks. inden for Energy, Materials, Industrials―infrastructure related―and Financials. På grund af de geopolitiske spændinger foretrækker Merrill amerikanske aktier, men banker ser også på europæiske aktier som gode muligheder, da de viser en stigende indtjening. Geopolitikken, især omkring Ukraine, er den helt store risikofaktor, der ikke er indkalkuleret godt nok endnu, mener Merrill.
Our Most Frequently Asked Questions
There has been no shortage of uncertainty for markets and investors one month into 2022— from record inflation prints and adjusting to a Fed tightening regime to concerns over a growth slowdown in China; contentious geopolitical issues to vicious index-level pullbacks, corrections and bear markets not seen in years.
Pessimism is in—as seen by the sharp increase in the percentage of investors who are now bearish on short-term market expectations, reaching 52.9%—the highest number of bears since 2013.
In an attempt to provide some clarity on these topics, we address some of the most frequently asked questions we’re receiving.
What are our key risks to the outlook this year?
The risk that eclipses all other risks is overly aggressive policy around the Fed’s triple threat of tapering asset purchases, raising the fed funds rate and shrinking its balance sheet. Four to five Fed rate hikes are currently priced into markets (about one per quarter through the end of this year), taking the fed funds rate to around 1.25% by year-end. The market will likely price in additional hikes as the year progresses with inflation currently running well above the Fed’s targets.
A second risk on our short list is the associated volatility and uncertainty of November’s midterm elections, with the prospect of a Republican sweep (in the House and Senate). Midterm election years are the most volatile of the four-year presidential cycle especially in the lead up to November until a bullish period begins right around election time.
A third risk worth monitoring are geopolitical tensions like Russia’s threat of invading Ukraine. The market response: Russian Equities, which represent only a 3.2% sliver of the MSCI Emerging Markets (EM) Index, have fallen into a bear market. Next most disruptive risk would be to the energy markets, raising the risk of recession for Europe (More on Russia/Ukraine risks below).
How could corporate earnings remain resilient given rising wages, margin pressures, and tougher YoY comparisons?
So far a better-than-expected earnings season for Q4 2021 has unfolded for the S&P 500, while the magnitude of beats has moderated from recent quarters. Companies have absorbed higher prices from wage increases or record freight costs, as examples, or passed on rising costs to end-consumers. The effect of inflation and rising rates has been specific to sectors, industries and companies, leading to higher dispersion in earnings. This augurs for an emphasis on higher-quality, high free cash flow names with demonstrated pricing power.
In aggregate, margins may have peaked around mid-year 2021 at a little over 13%, although the fully reported Q4 earnings season will be the guide. Central to our view is that while peak profit growth is behind us, peak profits are not. Corporate profits remain on an uptrend, with 2022 U.S. return expectations including dividends likely to track profit growth. Strong earnings were an important driver of 2021’s market performance, and 2022 should be no different, in our view.
How could the inflation outlook and the rising interest rate environment effect portfolio positioning?
Still intact has been our relative call of maintaining an Equity overweight relative to Fixed Income. Otherwise, rotations will likely prove to be a common feature of the market this year. This includes the rotation toward cyclical/value names. Generally, we believe sectors and industries with pricing power (Energy, Materials, Industrials―infrastructure related―and Financials), economic leverage and strong profits growth mixed with attractive valuations should dominate the year.
We find value down the capitalization spectrum in S&P Small-caps, which are holding at their cheapest level in 20 years and have more exposure to cyclical areas that do well when the broader economy and inflation are strengthening. Higher-volatility times and pullbacks could be leveraged as potential buying opportunities to add to our preferred areas.
How should we think about high growth-oriented thematic investments given our preference for cyclical and Value-based areas?
The global pandemic acted as an accelerant for many themes and trends that already took hold at the start of the decade. While the innovation that carried us through the pandemic is still important, especially for long-term investors, given our view that the market rotation toward cyclicals and Value leadership should continue, a balanced approach to
thematic exposure with some cyclical and Value may make sense. Consider exposure to themes like cybersecurity, shifting supply chains—where the factory of the future is more automated and closer to home, and investment in greener/cleaner infrastructure—which are mineral and material intensive—within a balanced portfolio.
Given the massive run up in U.S. Equities over the past three years, could it be time to venture overseas and consider increasing non-U.S. allocations in portfolios?
After several years of U.S. Equity outperformance, EM and International Equities have started 2022 as relative outperformers. However, there are a number of crosscurrents facing global markets today that lead us to maintain our preference for U.S. Equities over the rest of the world, and remain neutral both EM and International Developed Equities.
As an attractive feature, International Developed Equities add cyclical and value exposure.
The earnings revision ratio for Europe in particular is seeing accelerated upgrades and stands at the highest in the world. While the global ratio remains above 1―more analyst upgrades than downgrades―EM and Asia Pac-Ex Japan are noticeable laggards with both ratios declining in January and with downgrades outnumbering upgrades. In terms of valuation, international markets are less expensive than their U.S. counterparts.
However, the effect of the ongoing pandemic, a Fed that has made a hawkish pivot, a stronger U.S. Dollar, and high oil prices all may pose significant headwinds for international markets, especially EM. Within EM there is also concern over China growth moderating and what the effect of “zero-covid” policies may be. Investors will also look to the pace and commitment to policy easing by the People’s Bank of China as a potential positive. For now, while these crosscurrents and a backdrop of heightened geopolitical tensions play out, we maintain our strategic weighting to both International and EM Equities.
How could geopolitical risks (aka Ukraine/Russia tensions, China) effect U.S. capital markets and factor into portfolio construction?
There is no shortage of geopolitical hotspots in the world today—tensions are rising and are often unforecastable risks. Historically, selloffs related to geopolitical events tend to be short-lived, with pullbacks averaging 6% to7% and, on average, recovering in the subsequent three months, according to BofA Global Research. For example, in 2014, when Russia
annexed Crimea, the S&P 500 declined 4% peak to trough. 2022 is also a year of heightened policy risk, with countries comprising more than 50% of global GDP having elections or leadership changes this year. While it is best to avoid selling based on headline risk, a welldiversified portfolio remains the best way to position for the unknowns about geopolitics.
That said, some beneficiaries of the current red hot geopolitical landscape may include U.S. markets relative to the rest of the world, and the U.S. dollar as an expression of risk-aversion, defensive stocks as tensions are likely to remain elevated, and the North American energy sector, as the European Union may be pressured to find more reliable sources of natural gas. Our view is that an escalation of tensions between Russia and Ukraine is not currently priced into the market, so this risk bears watching
