Monday 7th February 2022
No shortage of triggers for the next stock market selloff
Speaking ahead of the Federal Reserve’s much anticipated announcement, Paul O’Connor, head of multi-asset at global manager Janus Henderson, highlights that there are many more risks on the horizon than interest rates alone.
In terms of the adjustment that markets are making in light of a potentially higher discount rate, “it is far from obvious that this process is complete,” he says, suggesting the Federal Reserve will not end the market’s struggles with pricing-in the “new normal.” He expects this issue to remain the dominant theme for global stocks for many months to come.
The seemingly never-ending US reporting season, which has “already produced some sizeable price responses,” stands out as a major risk, offering little scope for disappointments even among the big names like Netflix.
Ukraine is clearly in focus for European investors and those allocating to the region. While most issues are likely to be “localised” there is a “risk of rapid escalation” along with very little visibility on potential outcomes. The biggest issue highlighted by O’Connor coming out of the Ukraine impasse is a potential squeeze on natural gas prices at a time when markets are already extremely tight.
Looking East, China is unlikely to stay out of the headlines for long, as the battle between the optimists and pessimists continues. O’Connor says “pessimists can focus on slowing growth and the difficulties in the property sector,” but “optimists can argue that these concerns are well known and well-priced.” Janus Henderson sees scope for a tactical rebound in Chinese stocks this year.
The team remains overweight to UK stocks, due to their “attractive valuations” and hopes of a rotation back into this market after years of flows being directed to the US. While the FTSE100 has been strong since 2020, it appears to be bottoming-out following recent rate hikes.
In a positive sign for negative new weary investors, he concludes noting that “history suggests that localised military conflicts do not tend to have a lasting impact on global markets and with some bad news already priced-in here, we see future developments on this front as offering fairly symmetrical risks to European stock markets.”
Drew is editor of The Inside Network's publications and a principal adviser at Wattle Partners.
