Causes of current market sell-off

  1. US Rate Rises

  • Fed’s determination to see off inflation with rate rises has not been seen since the 1980s.

  • In their view Financial conditions are still too accommodating, stoking inflation.

  • This means that rate expectations continue to rise, with the view that the Fed will keep amping up the hawkishness until inflation starts to fall.

  • This will be achieved either by curtailing demand, or dragging back the equity market, or potentially some sort of systemic failure.

  • Particular punishment has been reserved for the NASDAQ which has been the posterchild of speculative lockdown retail investing.

 

  1. China Economic Weakness

  • Zero Covid policies are creating gridlock in manufacturing and logistics.

  • Truck drivers are not operating for fear of catching COVID and being sent to quarantine with their families.

  • Situation is untenable, either they use a better vaccine or improve Sinovac, or they use draconian lockdowns to expunge the virus and lock the borders once again.

  • CCP however has a Growth target of 5% how does that reconcile? We still think significant stimulus is on the way if they can resolve the situation as per above.

 

  1. European Stagflationary Fears

    • Ukrainian conflict persists with no end in sight.

    • European incapable of properly sanctioning Russia on energy exports, meaning continued funding for the Russian army.

    • Until they are prepared to do so this situation will continue.

    • High energy prices are crippling consumers and businesses to boot

 

Outlook

 

In the short term, sentiment is poor and unlikely to recover fully until the Fed relents on rate rises.

For balanced investors, the environment has been particularly tricky given there has been nowhere to hide, with bonds having the worst start to the year on record.

In the medium term, we are constructive, as we think a recession in the US can be avoided, and valuations in a more reasonable range, even on the NASDAQ.

Australian Equities remains the standout market, with earnings on an aggressive upgrade cycle, valuations very favourable even accounting for rising interest rates.

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