Blood-letting, cont’d

The week to 17-06 was another one of blood-letting (c. -5% for European & US equities) as markets moved on from the actual implementation of a rate rise to the sudden realisation of the endless dire consequences starting with the US housing markets. Pricing a recession, and when, is the next guessing game now that the Fed is bent on unrooting the runaway inflation.

There are clear signs that prices work their magic, i.e. the post-COVID absurd spending on new bags, cryptos or lawn-mowers is reaching its conclusion. Rate rises in the UK, Switzerland and promises of such from the ECB confirmed that central banks are meaning business. Warnings about daily consumption being financed by consumer loans suggest that it will not be long before modest households need to restructure their balance sheet (an understatement).

The elevated property market should tank everywhere in the West. China’s growth will now be wasted to Xi’s zero COVID path into a September vote for his third mandate. Russia plays a sensible card, that of cutting its gas delivery to Europe and thus shows that the Western supply of powerful weapons to Ukraine does not come for free.

EDLP, equity-wise

Sector-wise, Semiconductors led the value destruction. This is consistent with Health losses, both sectors being hammered by their (still) high P/Es. More interesting are the retreat of Metals, Chemicals, Building Materials and … Oils suggesting that the inflation fiesta is behind. Usual ports of call kicked in with Food Retail, Telcos and Insurance limiting losses.

Inflation-benefiting sectors capitulate

The fear gauge, i.e. the proportion of stocks with a very negative share price momentum reached a rare high at close to 55%, a figure seen only once over the last five years (March 2020 on COVID fears). The peak of fear is presumably not far, as the 60% mark has never been reached. 

In the same vein, the rate volatility index (MOVE) shot up over the week to levels last seen in the March 2020 peak fear. At 12.5x their 2022 earnings, European equities look like being better priced if one is happy to plunge into Deep Cyclicals and Banks.

If afraid to do so, then the price tag is 16.5x which remains expensive on earnings still seen up 8% or so. Earnings have yet to capitulate, i.e. corporates have to recognise that their rosy growth dreams have gone ex and P/Es are effectively closer to 18-20x, implying another 10-20% leg down.

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