I have never seen in 20 years of investing such a confluence of fundamental factors pointing to a bear market scenario for stocks like this year.
First, it was the Covid19 pandemic outbreak that disrupted the supply chains, then it was the conflict between Ukraine and Russia. We’ve seen the Oil price ranging from 0 to 150$ starting with the middle of 2020 and up to 2022.
FED Chairman Jerome Powel finds that inflation it's non-transitory anymore and the EU representatives expect 7.8% inflation this year.
The war between Russia & Ukraine also fuelled the inflationary pressure. The FED already hiked the interest rate, but The European Central Bank kept its benchmark interest rates unchanged, Australia & UK also will hike it in the following months.
Stagflation is our base expectation for this year and we’re avoiding buying Growth Stocks. We’re looking forward to start investing at lower prices.
Our recommendation for January to keep the Dividends Stocks and sell the Growth Stocks was beneficial: from year to date:
- Vanguard High Dividend Yield Index Fund ETF (VYM) it's up with 0.9%
- Large Caps Ishares ETF (IVW) it's worst performing in red with -14%
- SPDR SPX 500 (SPY) registers -7% from 1 January
- Small Caps CORE (IJR) in red with -11,4
- Large Cap Value Stocks (IVE) -1% near to Dividend stocks
- Mid-Cap Value Stocks (IJJ) -3%
- SPHB (high Beta) -9%
What is the thesis behind this evolution?
The theory is that elevated risk of high inflation and slower economic growth favour the shares with relatively rich payouts.
In a recent letter to JP Morgan Chase (JPM) shareholders, Chairman and CEO Jamie Dimon warned that the war in Ukraine could collide with rising inflation to slow the domestic economic recovery and alter global alliances for decades to come.
"They (referencing Ukraine and inflation) present completely different circumstances than what we've experienced in the past-and their confluence may dramatically increase the risks ahead. While it is possible, and hopeful, that all of these events will have peaceful resolutions, we should prepare for the potential negative outcomes."
What are our expectations for this year:
- 50 points rate hike in the EU in May, maybe 75 points if the Energy Sector and food prices will grow much more from now.
- The global economy, even before the rate hikes, is deteriorating far faster than the consensus expects.
- We expect consumer confidence to suffer in the months ahead and we will continue monitoring the indices.
- Food shortages and rising food prices can converge to a possible global food crisis in 2023 and social uprisings.
- Globalization is dead, and also the global cooperation between the major actors: USA, Russia and China for decades from now.
- European inflation is at the worst levels in the last 75 years - and the ECB will have no choice but to raise rates faster than the consensus expects.
- Europe will be in Recession from the middle of 2022.
In a recession environment nobody wins but what counts is who loses the least.
According to what we mentioned above, we prefer to invest in bank Indexes in Europe, because the banks are likely to benefit from a rate increase scenario that will happen this and in the next year, and we will avoid investment banks. We acquired the EXX ETF this month.
Also, we maintain our bullish view on grains and we consider now that it was a mistake to close some of our positions in March https://topfxinvest.com/blog/we-anticipate-the-food-crisis-in-2022
We want to close some Energy positions with profits this year on CNQ, PBR, TPZ, PIF, ALVOF.
I see carbon Emissions contracts as a very good hedge against inflation and we acquired last month CARB ETF & NETZ stock in Canada.