Global stocks have endured a tough week, and a tough year so farbut some strategists believe the recent sell-off is unlikely to pave the way for a market capitulation.
The S&P 500 closed Monday trading down more than 16% since the start of the year, and down nearly 12% in the second quarter alone. the pan-european Stoxx 600 was down more than 13% for the year on Tuesday afternoon, and the MSCI Asia ex Japan closed Tuesday trading more than 16% lower.
Investors have been fleeing risky assets due to a confluence of interlocking factors, including persistently high inflation, slowing economic growth, the war in Ukraine, supply shocks from China, and most importantly, the prospect of interest rate hikes by the of central banks seeking to curb consumer price increases.
However, strategists told CNBC on Tuesday that there are still opportunities for investors to generate returns, although they may need to be more selective.
“Obviously, there’s a lot of fear in the markets, there’s a lot of volatility. I don’t think we’re at fully capitulated levels yet, at least based on the measures we’re following. I don’t think we’re quite oversold territory right now,” he said. Fahad Kamal, chief investment officer at Kleinwort Hambros, told CNBC’s “Squawk Box Europe.”
Kamal suggested that mixed signals of a “reasonably strong” economic backdrop and mostly solid earnings, offset by rate hikes and inflation concerns, meant it was difficult for traders to assess the likelihood of a bear market emerging across the board. rule.
However, given the sustained and substantial rally in global equities from their pandemic-era lows over the previous 18 months, he argued that markets were “overdue for a correction” and as such has maintained a position neutral on the stock for now.
“There are many reasons to think that things are not as dire as the last few days and this year in general suggest,” Kamal said.
“Obviously one of them is that we still have a strong economic paradigm. If you want a job, you can get it; if you want to raise money, you can; if you want to borrow money, albeit at slightly higher rates… you can, and those Rates remain historically low.
Kamal argued, drawing on Kleinwort’s investment model, that the economic regime remains reasonably attractive to long-term investors, and most economists are not yet forecasting a recession, but acknowledged that stock valuations are not yet cheap and the momentum is “deeply negative”.
“The sentiment is not yet at full capitulation levels. We are not yet there where people want to stampede out of the exit no matter what. There are still a lot of smaller ‘buy the dip’ sentiments out there, at least in some parts of the market,” he said.
“We think there’s still a lot of economic support, and that’s why we haven’t de-risked and we’re not completely sitting on the sidelines, because there’s enough support, particularly in terms of corporate earnings.”
Central banks have had a substantial influence on the direction of the market, with the US Federal Reserve and the Bank of England raising interest rates and beginning to adjust their balance sheets as inflation hits multi-decade highs.
The european central bank he has yet to get his hiking cycle going, but he has confirmed the end of its asset purchase program in the third quarterpaving the way for the cost of borrowing to rise.
Space for stock selection
Monica Defend, director of the Amundi Institute, told CNBC on Tuesday that as long as real rates, the inflation-adjusted market rate of interest, continue to rise, risk assets will continue to suffer the way they have so far in 2022.
“It’s not just about the amount and size of the hikes, but more about quantitative tightening and therefore tighter financial conditions and tighter liquidity,” he added.
Like Kamal, he did not anticipate the mass exodus of investors from stock markets that would be typical of a protracted bear market, suggesting instead that many investors would be eager to re-enter the market once volatility has moderated.
“For volatility to subside, the market has to fully discount the forward guidance shown by central banks, which is not yet the case,” he explained.
Defend added that earnings may provide an “anchor” for investors, but warned there is some risk of margin compression in future earnings reports as the gap between producer and consumer prices widens.
He suggested that while establishing a broad “top-down” approach to investing in the equity markets at this time may prove difficult, there is an opportunity for stock pickers in quality and value stocks, including financials, who can benefit. of the environment of rising rates.
What could go right?
Behind the turbulence in the stock markets, credit and rates have also sold off in recent weeks, while the traditional safe-haven dollar has moved sharply higher, showing the dominance of increasingly bearish sentiment. in the last weeks.
Because of this low starting point for expectations, HSBC Multi-asset strategists suggested in a note on Tuesday that there is scope for a strong rally in risk assets and developed market bonds if this changes, with positioning and sentiment taking a nosedive of late.
However, HSBC remains “firmly risk-averse” as indicators from the British lender suggest a “high probability of a growth shock in the next six months”.
“Our aggregate gauge of sentiment and positioning is just above the 10th percentile. Historically, levels like this have been indicative of very positive returns for equities versus DM sovereigns or cyclical equity sectors versus defensives,” he said. Max, chief multi-asset strategist at HSBC. Kettner said in Tuesday’s note.
“However, the problem is that the actual positioning still seems to be quite high. For example,
Our aggregate positioning index across a sample of real-money investors indicates that they are still net-long, high-yield, short-net-duration stocks.”
This would indicate that beyond a short-term relief rally, as seen in March, the downward trajectory would be difficult to reverse without new fundamental support from the economy, he said.