Although the media continue to closely monitor developments of the covid-19 pandemic, financial markets have found another source of concern: interest rates. Indeed, investors have long been accustomed to low interest rates by central banks. In 2021, the bond markets experienced strong shocks that financiers were no longer used to. Since January 1, ten-year rates have climbed 0.63% in the United States, 0.80% in Canada and 0.53% in the United Kingdom. Even in Switzerland, Confederation rates jumped 0.30%.
The consequences have been quite different depending on the nature of the asset. While bond indices have lost between 3% and 4.5% year-to-date, the MSCI World Equity Index is up around 1.5%. However, we need to go into more detail to see more clearly. Indeed, the rise in rates has severely penalized growth stocks, and especially high-tech stocks, due to the high and even unreasonable valuations that can be found there. We have seen stocks lose more than a third of their value in less than six weeks. Cloud, electric cars, hydrogen, and other trendy themes have seen stock prices drop significantly, between 20% and 40%! During this time, financials, securities that no one wants anymore, have soared. UBS shares have gained 16% since the start of the year, BNP Paribas 22% and Société Générale 28%. The petroleum sector, another sector out of fashion with the rise of sustainable investing, has benefited from the rise in crude prices. It must be said that the securities were too low and the dividends of 7% or 8% were too high. Total shares have gained 15% year-to-date, Royal Dutch 25%. And what about Exxon shares which rose more than 47%, not counting the dividend of 5.7% or Occidental Petroleum shares which rose almost 70%?
The real economy does not justify fears of a return to inflation, and we should not fear a significant rise in rates from current levels. We are simply witnessing a normalization of rates. However, the sector rotation which will have been accentuated by the rate hike illustrates two things. First, investors behave like sheep and are invested in the same way and miss important inflection points in the markets. Second, asset valuation is the core of any investment. Some assets now look cheap, even if rates went up a little while other assets look overly expensive, no matter what might happen to the rates.
This is not a recommendation but just our opinion. Please consult with your financial advisor before investing!
Investors often distinguish between high growth companies ("growth stocks") and defensive companies ("value shares"). The purpose of this distinction is to take into account the expected future growth in the frame of the valuation of the share price. Indeed, this is the only realistic way to compare a growing company with a company whose business…
Intuitively, changes in company shares should follow changes in company profits. The more a company grows its profits, the greater the creation of shareholder value should be.
However, interest rates and injections of liquidity by central banks have distorted this relationship between earnings and stock price development.
Here are some examples of well-known values.
Since the late 1970s and early 1980s, many developed countries have not experienced inflation. To the contrary, inflation rates have kept falling, dragging interest rates lower. Forty years of disinflation This phenomenon of "disinflation" can be explained by three factors. The first factor is the demographic trend marked by a drop in the number of…
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