We use cookies to make your browsing experience better. Agree and share a cookie with us!

Markets took a breather after a great run in 2021 | Luminor

Markets took a breather after a great run in 2021

  • Markets priced in 5 FED interest rate hikes this year
  • Better than expected fourth quarter earnings support stock prices

In January, comments from central banks and consequences of heightened probability of a military conflict in Ukraine forced investors to reevaluate their willingness to take risk and added extra selling pressure. The world equity index (MSCI World TR EUR) dropped more than 3.9% during the month.

It is worth noting, however, that emerging markets were not affected equally. The emerging market index contracted only by 0.5%. For the first time in almost two years, the Chinese central bank cut its key interest rate to help economy, which has been losing momentum due to the difficult situation in the real estate sector and consequences related to repeated COVID outbreaks. Such action clearly shows that priority shifted away from reining in financial risks towards supporting growth. The newest leading manufacturing sector data (PMIs) shows, that the country’s manufacturing sector is on a verge of contraction. Nonetheless, debt levels in the country are still concerning. For example, the debt (government, corporate, and household sectors) to GDP ratio is declining, yet still stands approximately 270%.

During the US central bank (FED) meeting in January 2022, the statement of the chairman Jerome Powell was not accepted by investors positively, who expected moderating language towards rate hikes. The chairman indicated that this cycle is different from the previous one and he believes that the US economy recovered enough to handle higher interest rates without threatening the labor market. Market participants expect the first interest rate rise in March 2022. Overall, the market is currently pricing in five rate hikes this year to reach about 1.35%. Meanwhile, investors expect two rate hikes in Europe this year, despite ECB governor’s Christine Lagarde’s statements that any move this year is "very unlikely".

US inflation and interest rates


Source: Bloomberg L.P.

Fourth quarter earnings announcements are the positive factor that is expected to help containing correction of share prices. Nearly half of S&P 500 companies already announced their quarterly results. Most companies were able to beat sales and earnings forecasts. On average, sales grew almost 16%, while earnings climbed roughly 27%.

“House view” update

A lot of bad news are already priced in, especially in growth stocks in developed markets. Although deterioration in the few closely followed technical indicators shows increased risks, a 5-10% correction was widely expected and is usually healthy in order to sustain a long term trend. We remain cautiously optimistic and maintain neutral risk allocation.

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.