Chart of the Week
2022 saw equity and bond markets fall in lockstep. The Euro Stoxx Net Return Index fell 12.3% and US 10-year Treasuries fell 14.9%. Looking more closely at equities, performance significantly diverged between growth stocks (technology, luxury, biotech, etc.) and their cyclical counterparts (banking, oil, industry, etc.). The MSCI Europe Growth Net Return Index fell 17.7% over the 12-month period, while the MSCI Europe Value Net Return Index slipped just 1.1%.
Growth stocks, which are logically very sensitive to the risk-free rate used in valuation models to discount future cash flows, were heavily penalised by rising rates in 2022. The value segment, where return on investment is faster and dividends are higher, was less affected by the interest rate backdrop. Certain value stock sectors, such as banking, even benefit from rising interest rates. Meanwhile, some oil and gas stocks have seen their share prices increase on the back of energy price inflation. This is the logic behind cyclical-stock resilience that may seem counter-intuitive amid widespread economic decline.
Looking ahead, these trends may have further to go as central banks pursue monetary policy tightening. However, although cyclical stocks potentially harbour more upside relative to growth stocks, the significant recession risk overshadowing 2023 could be a drag on equity markets across the board.
The opinion expressed above is dated 13 January 2022 and is subject to change.
See also: https://latribune.lazardfreresgestion.fr/en/fixed-income-in-2022/
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