Outlook: interest rates keep going up…
Interest rates are moving up, and equity investors are responding in a predictable way by selling highly valued stocks and buying “cheaper” stocks instead. This pattern was seen in many prior episodes of monetary tightening and/or economic slowdown. I expect that investors will be biased towards inexpensive stocks until they see that the rates are peaking. This can take a few quarters because even if the war in Ukraine stops immediately, the reallocation of commodity trade flows will take time, keeping prices of commodities, transportation services, energy, and food at elevated levels. Should Central Banks continue to rise interest rates to fight inflation, the Global economy may slow down materially. It is interesting to note, that year-to-day the Euro has depreciated against USD by 8%, making oil, which is priced in USD, more expensive in Europe.
Despite currently visible signs of economic slowdown in the US, in Europe, and in China, government spending and fiscal stimulation may help to avoid a global recession. Most recent Government statements coming out of China suggested that to compensate for COVID lockdowns, the country will increase spending on transportation, information technology, energy generation, and water supply. Accelerated spending on infrastructure can be expected in the US and in the EU.
The war in Ukraine.
The military confrontation continues with no end in sight. It is clear by now that the end of the conflict by May 9th is unlikely. Given that Western military equipment started to trickle in, and it takes a few weeks for the Ukrainians to train on it, time is on the side of the Ukrainian army. Based on accounts in the Ukrainian media, the Russian army does not have sufficient infantry for a quick advancement. The Russian military is trying to remedy the situation with a massive recruitment campaign, which could produce results over time. At the same time, most observers believe that a general mobilization in Russia is unlikely due to political considerations. Russian media is not providing too many details, but the intensity of the military propaganda makes me think that the war will continue for some time. Theoretically, the Russian government can declare victory and end of the “special operation” at any moment. Their ultimate goal which many believe is to advance to the administrative borders of DNR/LNR, is not known with any certainty. Given the very slow pace of the Russian advance it easy to see the conflict lasting for another six months, or possibly longer.
Inexpensive stocks.
Given high stock market volatility, I am reluctant to add a lot of new names. I am looking for companies which will benefit from post-covid resumption of travel, inexpensive valuation, and reasonable pricing power. I think that Heineken (HEIA NA), a global brewer, foots the bill. Under new CEO the company going through a comprehensive restructuring, inclusive of digitalization, cost optimization, introduction of new products, aggressive price policies, and focused marketing. The stock is relatively inexpensive and should do well in the current economic environment.