Central banks are pressured to raise rates | Luminor
Central banks are pressured to raise rates
- Equity indexes declines
- Global growth forecast lowered
April proved to be another challenging month for financial markets. Ongoing war in Ukraine pushed prices of goods and services even higher and central banks around the world were pressured to increase interest rates. More than 60% of the world central banks’ latest decision was to raise rates. This situation prompts continued reevaluation of risky assets. Developed market index in euros (MSCI World TRN) contracted 3,3%, while emerging markets (MSCI EM TRN) index in euros declined 0,4%.
World Bank announced the creation of a 170 billion USD rescue package – bigger than its COVID‑19 response – for crisis hit nations. In its latest outlook IMF warned about possible “seismic waves” rolling over the global economy, especially in emerging markets as fuel and food prices have increased rapidly, hitting vulnerable populations in low‑income countries hardest. IMF cut its 2022 global growth projection by 0,8 percentage points to 3,6%. Developed markets growth projections lowered by 0,6 percentage points to 3,3%, while emerging markets forecast was cut by 1 percentage point to 3,8%.
For the past 20 years Emerging markets economies grew at a faster rate than that of developed countries. Higher economic growth also was reflected in local stock market, but movements in emerging markets index were relatively larger both to the upside and downside. Over the last few years emerging markets lagged developed markets substantially. Even after this period of weakness Emerging market index (MSCI EM NTR in euros) in 20 years period grew about 320%, while developed market index (MSCI World NTR) in euros grew 260%. If emerging market economies continue growing at a faster rate it would be reasonable to expect historical pattern of outperformance to once again reclaim itself.
GDP growth comparison
Equity indexes
Source: IMF.org, Bloomberg L.P.
US Federal Reserve chairman Jerome Powell reiterated commitment to getting inflation down to 2% and signaled support for further aggressive tightening to curb inflation. He announced, that “50 basis points increase will be on the table during May meeting”. It is also widely expected, that one more 50 basis point increase will follow in July.
In April Chinese mainland stock market index CSI 300 declined towards lowest level since June 2020, but afterwards started to rebound. Chinese government urged country’s banks and insurers to buy more local equities to support falling stock markets. Nation’s strict Covid Zero policies, crackdowns on biggest local IT giants and other companies, faltering real estate sector and slowing economic growth spooked investors. Recently government promised to stabilize markets, vowed to speed up implementation of supportive measures, including tax cuts and fee reductions.
China central bank did not cut key policy rate which stayed at 2,85%, disappointing most economists who had expected a reduction to help economy amid worsening Covid outbreak. Authorities will probably try to boost confidence levels before 20th National Congress of the Chinese Communist Party where it is believed, that precedent‑breaking third term of president Xi Jinping will be confirmed. Congress should be organized on the second half of 2022. Priorities presented during the Party Congress will also help set China’s political, economic, and foreign policy trajectory for the next five years and beyond.
One positive effect from all the bad news is, that a lot of negative scenarios seems already calculated in stock and bond prices and it is unlikely to get such a negative surprise, which would push prices substantially lower.
“House view” update
In April Luminor Investment management team decided to keep decreased risk allocation budget and to keep higher exposure to defensive sectors (utilities, healthcare and energy). The investment team continues to monitor actions of the central banks, first quarter earnings season and possible consequences of war in Ukraine.
House view
Warnings
- This Marketing Communication is not considered investment research and has not been prepared in accordance with standards applicable to independent investment research.
- This Marketing Communication does not limit or prohibit the bank or any of its employees from dealing prior to its dissemination.
Origin of the Marketing Communication
This Marketing Communication originates from the Portfolio Management unit (hereinafter referred to as PMU) – a division of Luminor Bank AS (reg. No 11315936, with registered address at Liivalaia 45, 10145, Tallinn, Republic of Estonia, represented within the Republic of Latvia by Luminor Bank AS Latvian branch, reg. No 40203154352, address: Skanstes iela 12, LV-1013, Riga, hereinafter - Luminor). PMU is involved in the provision of discretionary portfolio management services to Luminor clients.
Supervisory authority
As a credit institution Luminor is subject to supervision by the Latvian Financial Supervisory Authority (Finanšu un kapitāla tirgus komisija). Additionally, Luminor is subject to supervision by the European Central Bank (ECB), which undertakes such supervision within the Single Supervisory Mechanism (SSM), which consists of the ECB and the national responsible authorities (Council Regulation (EU) No 1024/2013 - SSM Regulation). Unless set out herein explicitly otherwise, references to legal norms refer to norms enacted by the Republic of Latvia.
Content and source of the publication
This Marketing Communication has been prepared by PMU for information purposes. Luminor will not consider recipients of this Communication as its clients and accepts no liability for use by them of the contents, which may not be suitable for their personal use.
Opinions of PMU may deviate from recommendations or opinions presented by the Luminor Markets unit. The reason may typically be the result of differing investment horizons, using specific methodologies, taking into consideration personal circumstances, applying a specific risk assessment, portfolio considerations or other factors. Opinions, price targets and calculations are based on one or more methods of valuation, for instance cash flow analysis, use of multiples, behavioural technical analyses of underlying market movements in combination with considerations of the market situation, interest rate forecasts, currency forecasts and investment horizon.
Luminor uses public sources that it believes to be reliable. However, Luminor has not performed independent verification. Luminor makes no guarantee, representation or warranty as to their accuracy or completeness. All investments entail a risk and may result in both profits and losses.
This Marketing Communication constitutes neither a solicitation of an offer nor a prospectus in the sense of applicable laws. An investment decision in respect of a financial instrument, a financial product or an investment (all hereinafter “product”) must be made on the basis of an approved, published prospectus or the complete documentation for such a product in question, and not on the basis of this document. Neither this document nor any of its components shall form the basis for any kind of contract or commitment whatsoever. This document is not a substitute for the necessary advice on the purchase or sale of a financial instrument, a financial product.
No Advice
This Marketing Communication has been prepared by Luminor PMU as general information and shall not be construed as the sole basis for an investment decision. It is not intended as a personal recommendation of particular financial instruments or strategies. Luminor accepts no liability for the use of the Marketing Communication content by its recipients.
If this Marketing Communication contains recommendations, those recommendations shall not be considered as an objective or independent explanation of the matters discussed herein. This document does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the persons who receive it. The securities or other financial instruments discussed herein may not be suitable for all investors. The investor bears all risk of loss in connection with an investment. Luminor recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors if they believe it necessary.
The information contained in this document also does not constitute advice on the tax consequences of making any particular investment decision. The estimates of costs and charges related to specific investment products are not provided therein. Each investor shall make his/her own appraisal of the tax and other financial advantages and disadvantages of his/her investment.
Risk information
The risk of investing in certain financial instruments including those mentioned in this document, is generally high, as their market value is exposed to many different factors. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. When investing in individual financial instruments the investor may lose all or part of their investments.
Important disclosures of risks regarding investment products and investment services are available here.
Conflicts of interest
To avoid occurrence of potential conflicts of interest as well as to manage personal account dealing and / or insider trading, the employees of Luminor are subject to internal rules on sound ethical conduct, management of inside information, handling of unpublished research material and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. Luminor’s Remuneration Policy establishes no link between revenues from capital markets activity and remuneration of individual employees.
The availability of this Marketing Communication is not associated with the amount of executed transactions or volume thereof.
This material has been prepared following the Luminor Conflict of Interest Policy, which may be viewed here.
Distribution
This Marketing Communication may not be transmitted to, or distributed within, the United States of America or Canada or their respective territories or possessions, nor may it be distributed to any U.S. person or any person resident in Canada. The document may not be duplicated, reproduced and(or) distributed without Luminor’s prior written consent.