Monthly Review

Are we simply delaying the inevitable?

Written on
March 14, 2022

Investors’ concerns about the impending tightening of financial and monetary conditions were replaced by concerns related to the sharp rise in geopolitical tensions in February that culminated with the Russian army making its way into Ukrainian territory.

While the political and humanitarian crisis is unfolding in eastern Europe, the economic backdrop has been one of recovering activity after the lull imposed by the Omicron wave in late 2021 and the beginning of the new year. The February PMI readings in both the US and Europe rose unexpectedly as the service component picked up steam much faster than anticipated. The Eurozone composite PMI index bounced back to its highest level since September 2009, a welcome development after the 5 monthly declines in the previous 6 months. At the same time, price pressures have not let up, with US annual headline inflation reaching 7.5% in January.


Citigroup Economic Surprise Index (Global)

Sources: DGAM, Bloomberg, as of February 28, 2022


Several governments have announced an easing of COVID related restrictions. In the UK, Prime Minister Boris Johnson declared that England's remaining COVID restrictions would be lifted and that people who test positive will no longer be legally required to isolate, but will be expected to exercise personal responsibility.1 The Danish government had made a similar statement a few weeks earlier. Removing the restrictions will provide a boost to economic activity but likely won't be enough to offset the challenges ahead. One such challenge is weakening consumer confidence, which has proved to be vulnerable to persistently high inflation.


Consumer Confidence Hit by High Inflation

Sources: DGAM, Refinitiv, as of February 28, 2022


Amid geopolitical tensions, investors are downplaying the probability of an aggressive move by the US Federal Reserve. A 50 basis points (bps) rate hike was all but priced in the futures market by mid February, but recent developments in eastern Europe have pushed the odds back in favour of a smaller 0.25% increase. However as the current domestic economic backdrop remains one of growth with persistent inflationary pressures, some policymakers continue to argue for decisive action by the Federal Open Market Committee (FOMC)2. The next FOMC meeting will take place on March 16, and the most likely outcome will be a cautious rate hike as the committee assesses the impact on the US economy of both Russia's invasion of Ukraine and the ensuing government response.

Some investors see the ruling out of a more aggressive 50 bps rate hike in March as a reprieve. At the end of the day, the negative impact of the war in Ukraine on the US domestic economy will most likely be limited. Thus, the inflationary pressures should remain, and while equity investors may get a small break from the FOMC in March, it is simply delaying the inevitable: the higher rates needed to tame inflation.

We continue to monitor the credit market for signs of stress that could ultimately weigh on economic growth. So far, the yield increases have been controlled. While spreads remain low by historical standards, the level of indebtedness in the global economy is much higher today, which suggests a greater sensitivity to higher rates. As a result, larger financing costs and lower credit availability will, in due course, harm economic growth.


Credit Spreads

Sources: DGAM, Bloomberg, as of February 28, 2022


After a volatile start to the year, retail investors seem to have lost confidence, with the American Association of Individual Investors (AAII) sentiment bull index falling to a level that is rarely observed and with key indices moving past key support levels. The depressed indicators suggest that a short-term rebound is likely, but that longer term prospect for equities remains negative as holdings are still elevated.


Composite Index: Deviation from 200-day Moving Average

Sources: DGAM, Refinitiv, as of February 28, 2022


American Association of Individual Sentiment Bull Index

Sources: DGAM, Refinitiv, as of February 28, 2022


Interestingly, despite sluggish investors sentiment readings, equity fund flows have remained positive amid rising uncertainty surrounding financial markets3.


Flows and Price Disconnect
Equity flows, cumulative in $G vs MSCI ACWI Index

Sources: BofA Global Investment Strategy, Bloomberg, EPFR, as of February 24, 2022


At the end of the month, the aggregate valuation of global equities stood at the 88th percentile of the historical range compared to 96 12 months ago. US equities is by far the most expensive market, with the 12-month forward P/E multiple for the S&P 500 Composite index at 20x. This is 11% lower than one year ago but still above the 18x level we would expect with a US 10-year treasury yield near 2%. Using the current level of expected earnings for 2022 along with the multiple implied by a 2% treasury yield, we extrapolate a fair value for a US equity benchmark of approximately 4000.


S&P 500 Expected Earnings for 2022

Sources: DGAM, Bloomberg, as of February 28, 2022


It is worth noting that earnings growth expectations are elevated despite decelerating growth, profit margin headwinds and rising geopolitical uncertainty. Considering the long list of challenges, the risks to earnings growth in 2022 are skewed negatively, adding further downside risks beyond what could be considered fair value at the moment. The recent jump in the ratio of negative to positive guidance suggests as much4.


Ratio of Negative to Positive Guidance Ratio has Spiked in Q4
S&P 500 guidance relative to consensus expectations
Ratio at T-4; T=0 is end of quarter

Sources: Factset, Morgan Stanley Research, as of February 28, 2022



Market performance

MSCI ACWI Index: Country and Regional Returns

Total returns for 1M, 3M and 1Y as of February 28, 2022

Sources: DGAM, Refinitiv


MSCI ACWI Index: Sector Returns

Total returns for 1M, 3M and 1Y as of February 28, 2022

Sources: DGAM, Refinitiv




We continue to remain cautious, since we expect equity markets to follow the path set by the weakening fundamental backdrop, above and beyond the war in Ukraine. However, we also expect to take advantage of opportunities that may arise in the current volatile environment.



Sources :
1. Boris Johnson scraps remaining COVID restrictions in England – POLITICO
2. Fed’s Waller says bigger rate hike in March may be needed | AP News
3. The Flow Show: If it walks like a bear…, BofA Global Research, 24 février 2022.
4. Weekly Warm-up: Avoid the Blind Spot and Look for Operational Efficiency, US Equity Strategy, Morgan Stanley, 28 février 2022.



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