While the January news headlines focused on the escalating situation in Ukraine and UK political turmoil, markets have started 2022 with the most significant selloff since the COVID crash of February 2020. However, the selling has been focussed on specific areas of the market, particularly impacting technology and high growth companies, that were typically trading at high valuations. As a basket, these stocks were the top performers through the pandemic. While some are calling the current market conditions a “rotation” from growth to value, the bulk of value stocks’ outperformance has been down to the selling of growth rather than strong value returns, resulting in the falling market overall. Indeed, the outlook for cyclical sectors is generally weaker as the global economy slows from the economic rebound from the COVID pandemic.
Although there has not been a specific trigger for the selling, continuing concerns over inflation and the prospect of higher interest rates have made investors reassess what they are willing to pay for different types of assets and growth potential. Higher bond yields will naturally increase the opportunity cost for investors, making them less willing to provide capital to companies promising growth and profits in the future, rather than income today. This can be a painful readjustment, particularly for stocks that have enjoyed exceptionally low-interest rates for over a decade. However, it is important to remember that little has fundamentally changed with these companies and many still offer the prospect of significant disruption and high levels of growth. In a market that is indiscriminately selling growth stocks, there are increasingly good opportunities for stock pickers.
On a geographic basis, the selling has disproportionately impacted US equities, which are most skewed towards growth stocks, as well as being the most expensive market. A 10% drawdown contrasts with a flat performance from the UK market, reversing the trend seen in the final quarter of 2021. Similarly, Emerging Market equities that suffered on a relative basis during 2021, have held up well so far this year.
For the overall equity market, where valuations began the year elevated, the selloff has moderated this to a more palatable level. The outlook for global growth and earnings expectations remains robust and should provide support should the selling persist into February. Furthermore, the market is now more balanced between the differing styles and may mean that such rotations are less severe going forward.