These first few weeks of 2022 are currently pointing towards a continuation or even an intensification of the main themes that drove market trends for much of last year. Inflation is still the watchword, with rising rates following close behind. In the US, year-on-year inflation (CPI) rose by 7%, and the ten-year rate was again at a high of around 1.8%. This led to the Fed’s about-turn. It did so by deciding that inflation was no longer a temporary phenomenon and then announcing several interest rate increases for 2022 (the market expects at least four), as well as an accelerated sale of the assets accumulated on its balance sheets.
A more moderate climate prevails in Europe. The German Bund is hovering at around 0%, having just crept back into positive territory, and the ECB has done no more than declare a springtime end to the PEPP programme, with no mention of interest rate hikes. In Italy, these concerns are compounded by the delicate matter of the election of the President of the Republic at the end of January. “It’s generally expected that Draghi will remain Prime Minister, while an institutional figure of a certain stature will replace Mattarella. Clearly, any deviation from this scenario could lead to tensions on the spread and on the market. So, we expect volatility that may increase, but fleetingly so. We’re confident that the parties will succeed in finding a compromise that suits everyone and that won’t deflect from achieving the targets needed to obtain Next Generation EU funds”, commented Massimo Trabattoni, Head of Italian Equity.
“As regards sector performance, we expect good returns on commodities and energy in the first few months of the year, followed by gradual normalisation as some of the pandemic-related bottlenecks start to ease”. Undoubtedly, the rise in interest rates is detrimental to long-term assets, such as tech and utilities, as future cash flows are discounted with a lower valuation. In general, the cross-sector rotation movement from growth to value continues. “This movement is highly visible when you look at the performance of individual stocks and sub-sectors, but is less discernible if you look only at trends in market indices”, explained Trabattoni. The good performance of a few mega-caps has largely ensured that these indices are not far from record levels. But within them, especially in renewables and the software area of technology, most names have seen their capitalisation drop by almost half in the last six months. “All of this brings into focus a very quantitative type of trading based on algorithms that buy and sell baskets of equities, without much regard for the value of the individual underlying securities. To our mind, this is a time when stock picking can bring a lot of value to investors skilled enough to navigate the sea of volatility that central bank uncertainty has brought to the markets”, said the Head of Italian Equity.
Finally, it is interesting to note the gap created in the early days of the market between the FTSE MIB on one hand and the ITAMID and STAR on the other. “This can be explained by the excellent performance of small and mid caps in 2021, which is now drawing back a little, and also to the fact that the main index is much more weighted towards cyclical and value sectors, while the other two are geared more towards growth.”
Commentary by Massimo Trabattoni, Head of Italian Equity.