Global stocks have endured a hurricane week, and still a tough year, but some strategists believe the recent sell-off is unlikely to pave the way for market capitalization.
Monday’s trade has fallen more than 16% since the start of the S&P 500, and only fell about 12% in the second quarter. Pan-European stocks fell more than 13% year-on-year to 600 on Tuesday afternoon, and MSCI Asia X-Japan closed down less than 16% on Tuesday.
Investors are fleeing risky assets due to a combination of interconnected factors, including persistently high inflation, slowing economic growth, the war in Ukraine, the push for supply from China and, most importantly, the possibility of central bank interest rate hikes to rein in consumers. Price increase
However, strategists told CNBC on Tuesday that there is still room for investors to generate returns, although they need to be more selective.
“Of course, there is a lot of fear in the market, a lot of volatility. I don’t think we’re still in the full capitulation level, at least not by the steps we follow. I don’t think we’re in a sell-off right now,” Official Fahad Kamal told CNBC’s “Squawk Box to Europe”.
Kamal suggested that the mixed signals of a “logically strong” economic background and mostly strong earnings – offset against rate hikes and inflation concerns – meant that it was difficult for traders to assess the prospect of a full-blown beer market.
However, given the sustainable and significant rally for global stocks from their epidemiological lows over the past 18 months, he argued that markets were “suspended for a correction” and thus maintained a neutral position on stocks for the time being.
“There are a lot of reasons to think the situation is not as dire as it has been in the last few days and this year will be generally recommended,” Kamal said.
“One of them is obviously that we still have a strong economic precedent. If you want a job you can get it; if you want to raise money you can; if you want to borrow money, at a slightly higher rate. Maybe, and those rates are still historically low. “
Kamal argued that, based on Kleinwart’s investment modeling, the economic system is still reasonably attractive to long-term investors, with most economists still not predicting a recession, but acknowledging that stock valuations are still not cheap and the pace is “deeply negative.”
“Feelings are not yet at the level of complete surrender. We are still not where people want to get out of whatever they want. There are still a lot of small ‘buy the deep’ feelings, at least in some parts of the market,” he said.
“We think there’s still a lot of economic support, and that’s one of the reasons we haven’t reduced the risk and not completely sidelined it, because there’s enough support, especially for corporate earnings.”
Central banks have had a significant impact on market direction as the US Federal Reserve and the Bank of England raise interest rates and tighten their balance sheets as inflation rises to multi-decade highs.
The European Central Bank has not yet begun its hiking cycle, but has confirmed the end of its asset purchase program in the third quarter, paving the way for rising borrowing costs.
Space for stock picking
Monica Defendant, head of the Amundi Institute, told CNBC on Tuesday that as long as the actual rate – the market interest rate adjusted for inflation – continues to rise, risk assets will continue to suffer in 2022 as they still do.
“It’s not just about the number and size of growth, but much more needs to be done with quantitative austerity and therefore the austerity and liquidity of the financial situation is drying up,” he added.
Like Kamal, he did not anticipate a massive expulsion of investors from the stock market that would feature a prolonged good market, instead suggesting that many investors would be interested in re-entering the market once volatility subsides.
“In order to see the volatile mood, the market needs to set the price according to the forward guidelines displayed by the central banks, which is not yet the case,” he explained.
Defend added that earnings could provide an “anchor” for investors, but warned that there is some risk of margin compression in future earnings reports as the gap between producer price and consumer price widens.
He suggested that establishing a broad “top-down” approach to investing in the equity market at this time could prove difficult, as there is an opportunity for stock pickers in quality and value stocks, including financial ones, to benefit from a growing rate environment.
What can go right?
Behind the volatility in the stock market, credits and rates have also sold out in recent weeks, while the price of the traditional safe-haven dollar has risen sharply, showing a trend of increasing bearish sentiment in recent weeks.
Because of this low starting point of expectation, HSBC multi-asset strategists suggested in a note on Tuesday that there is an opportunity for a sharp rally in risk assets and developed market bonds if this change occurs, position and sentiment are called off.
However, HSBC remains a “strong risk-off” as British lender indicators point to a “high probability of pushing growth over the next six months”.
HSBC chief multi-asset strategist Max said: “Our overall sentiment and position indicators are just above the 10th percentile. Historically, such levels indicate a very positive return for equity vs DM sovereign or cyclical vs. defensive equity sector on Tuesday.
“The problem though is that the actual position still seems to be quite advanced. For example,
Our overall position indicators across a sample of real money investors indicate that they still have net long equity and high-yield and short-term net. “
This would indicate that outside of a short-term relief rally, as seen in March, it would be difficult to reverse the downward trajectory without some new fundamental support for the economy, he said.