LGT Private Banking Europe House View – February 2022


the of the Federal Reserve firmer stance and the impending escalation of the Ukraine conflicts cause stress on capital markets.

As rising interest rates are expected to continue to put pressure on technology stocks, we are reducing the sector to ‘underweight’. In the area of ​​fixed income securities, long-term interest rates should continue to rise, but at a slower pace than that observed since the beginning of the year.

LGT Private Banking Europe House View

The new trading year is only a few weeks away, but we have already seen major setbacks in global equity markets. The US stock market has lost more than 10% from its all-time high and is therefore in correction territory. The main reason for the very volatile start to 2022 is the of the Federal Reserve “warmongering” communication in recent weeks. Although the Fed has already tightened its rhetoric in the last quarter of 2021, it was not until the publication of the FOMC December minutes that investors have realized that things are now getting serious and that three major changes are on the horizon: an even faster reduction in quantitative monetary easing, several rate hikes this year and the reduction of the balance sheet of the central bank (Quantitative Tightening). However, there are huge performance differentials between stocks, both regionally and by sector. This divergence is also reflected in the policies of other central banks, as both the European Central Bank (ECB) and the Bank of Japan have yet to announce any changes to their expansionary monetary policy in the foreseeable future.

Already seen 2018?

The Fed’s communication in recent months has managed to avoid a ‘taper tantrum’ like the one we experienced in 2013. At that time, ten years US Treasury bond yields quickly rose from 1.7% to 3%, triggered by the reduction in quantitative easing. The current situation, on the other hand, is more comparable to the constellation of the fourth quarter of 2018. At that time, turbulence hit the financial markets as the Fed raised interest rates and simultaneously reduced its balance sheet. The markets were thus endowed with less liquidity. The US stock market has always struggled when liquidity has been reduced quickly and massively. Uncertainty among market participants is expected to remain elevated until the Fed’s first interest rate hike, which is expected on March 16, 2022.

Markets during a Fed rate hike cycle

There have been nine interest rate hike cycles in United States over the past fifty years. It should be noted that risky assets such as equities and commodities performed positively during these periods – however, the dispersion was huge. This means that, nevertheless, caution is advised when investing in risky assets in a rising rate cycle.

New clouds on the horizon

Over the past two weeks, uncertainty in financial markets has increased again. On the one hand, the Ukraine the conflict escalated rapidly in the second half of January, and on the other hand the American president that of Joe Biden ratings plummeted following the latest inflation figures. The Democratic Party could face a Waterloo in the next election in the fall, meaning there is a potential risk of losing both chambers in Congress.

The first few weeks of trading could be a harbinger for asset allocation in the months to come, as the two most important asset classes, equities and bonds, came under pressure at the same time. For example, ten-year government yields rose not only in the United States (+27 basis points), but also in the euro zone (+11 basis points), the UK (+20 bps), and even Switzerland (+12 basis points). This development reflects market participants’ expectations of receiving less liquidity from global central banks in the future. So far, only commodities and gold have been able to escape this trend and have actively contributed to diversification.

Keep the powder dry – “don’t buy the dip”

For several quarters, we have been betting on quality in all asset classes. This has not changed after the recent fix. In a market environment characterized by a withdrawal of liquidity, quality is more than ever sought after. This prompted us to take a little less risk in our investment strategy and to keep our powder, or liquidity, dry. During the month, we therefore downgraded US equities to “neutral” and reduced the technology sector to “underweight”. With the Fed’s monetary policy creating headwinds, corporate America is feeling the effects disproportionately. Caution is advised for companies that are barely making a profit and whose stock has lost 50% or more of its value in recent months. Until we have more visibility, we recommend pausing the ‘buy-the-dip’ strategy. In the short term, we advise to stay on the sidelines and increase liquidity. Accordingly, we are redefining the liquidity ratio to “overweight” and the capital ratio to “neutral”.

Equities: huge differences favor selection

The start of the year signals that stock market yield differentials will be huge in the year 2022, not only across sectors and industries, but also between regions and countries. Therefore, in our view, the most important success factor for equities remains selection, especially in terms of relative performance. We continue to favor consumer staples, the materials sector and European financials.

Fixed income: upward pressure persists

The rise in long-term interest rates has been considerable. We expect this rise to continue at a slower pace and the upward pressure to continue. The only exception we see is if investors take refuge in government bonds due to further severe losses in equity markets. This remains our risk scenario. Within the bond quota, we focus on short duration and continue to view hybrid bonds and Asian high yield bonds as attractive.

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Editor: LGT Bank (Switzerland) LtdGlarnischstrasse 36, CH-8027 Zürich

Author: Thomas Wille, Research & Strategy ManagerEmail: [email protected]

Editor: Alessandro FeziEmail: [email protected]


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