Overseas Observation in January:
What information is worth paying attention to under the Fed's interest rate hike expectations?
event
Fed rate hikes coming soon: The Fed's January 2022 meeting released a clear signal to raise rates, indicating that rate hikes will begin in March 2022 and end bond buying programs in March 2022, the QT start time is not yet fully clear, but is expected to begin after the rate hike starts. The anticipation of interest rate hikes combined with the uncertainty of the epidemic and geopolitical risks in january 2022 has led to greater turmoil in overseas stock markets. In this report, we sort out the risks and opportunities that are worth paying attention to under the Fed's interest rate hike expectations.
point of view
The U.S. stock market in the rate hike cycle does not necessarily perform poorly: while the signal of a rate hike has a negative impact on current market sentiment, there is no clear pattern between the U.S. rate hike and rate cut cycle and the performance of the U.S. stock index from historical experience. The reason behind this is that rate cuts usually occur during recessions, where earnings growth in stocks is limited, while rate hikes occur during periods of economic prosperity and overheating, with earnings growth benefiting from economic growth. Therefore, even if the valuation of stocks is negatively affected by interest rate hikes, it is still necessary to judge the market trend in light of the momentum of economic growth. In our view, the mutual game between the sustainability of economic growth and the monetary tightening brought about by inflation will be the most important overseas investment theme in 2022. It is recommended to continue to choose industries where profit growth can offset the impact of interest rate hikes. Examples include healthcare (long-term vaccine demand), information technology (web workplaces, virtual reality), fintech.
In the rate hike cycle, growth does not necessarily outperform value: the trend of the 10-year Treasury yield is not absolutely negative to the difference between the S&P growth and value stock index gains, and the difference between the growth stock and the value stock index PE. Although growth stocks do outperform value stocks in the long run in the context of overall interest rate declines, it can also be observed that interest rate trends rise and fall with growth stocks outperforming value stocks, such as in the periods of 1999-2001 and 2016-2018. At the same time, the valuation performance of growth stocks relative to value stocks does not have a clear correlation with interest rates. So even as interest rates rise, growth is likely to continue to outperform value.
QT ahead of expectations, yield curve flattening risk reduced: QT will follow after rate hikes begin in March, according to the Fed. As a result, the current fed intention to start shrinking its balance sheet may be earlier than global investors previously expected in July 2022. MMF funds in the RRP market are unlikely to be the main targets for this absorption of liquidity and are expected to remain at a high level. We expect QT to primarily lead to the withdrawal of funds from MBS and U.S. Treasury markets, thereby creating greater upside risk for long-term interest rates in these markets. In addition, due to the early filing of the balance sheet reduction, the number of Fed interest rate hikes in 2022 may be less than expected, and the risk of flattening of the US Treasury yield curve is reduced. If the scale is reduced too quickly, and the size of reserves declines faster than banks can afford, it will be prone to liquidity shortages. This impact is more difficult to be priced in the risk asset market and requires more attention.
Keep an eye on individual stock rebound opportunities: We've summarized 25 S&P 500 constituents (as of February 4, 2022) that have fallen by more than 30% from their highest price touched in the past year, sorted by the proportion of "buy" ratings currently given by global analysts in the FactSet database. It is recommended to focus on the next rebound opportunities of the higher-ranked stocks.
Risk Warning: Interest rate hikes in overseas markets exceeded expectations, resulting in lower valuations offsetting the upward momentum of earnings growth. The overseas epidemic has repeatedly worsened the supply chain crisis. The Fed's balance sheet reduction has led to a serious lack of liquidity, and interbank interest rates have fluctuated sharply.
This article originated from the financial world