Challenges and opportunities across the investment environment

This year began with a lot of tension as the global market is volatile. The tailwinds of the previous year are now increasingly demanding to behave like potential headwinds in the global stock market.

The Fed’s extraordinary stimulus, coupled with accommodative monetary policy, served as a key factor in last year’s significant rise across all risk asset classes.

Similarly, the financial scale provided by US and European authorities provided a solid cushion for the unemployed and the low-income group. As we get out of the shadow of the pandemic, both of these factors could provide great speed braking for last year’s large rally. Inflation will continue for much longer as supply chain problems hinder recovery-related growth.

Despite all the challenges of the past, a year ahead could offer pockets of opportunity in different ways.

Top challenge

01 – Navigating the rippling waters along a central bank rowing boat
For investors in the global market, much depends on the ability of central banks to stay neutral. The fully hawkish Fed could lead to more uncertainty and a path of volatility. In the worst-case scenario of the market, more sustainable adjustments may be made across all risk assets.

02 – Very high rating in a particular sector
After closing the first month of trading, the market is aiming to further discount the possibility of more interest rate hikes. This is especially dangerous for the top US technology growth stocks. The Nasdaq Composite has already been revised by 10%, and sustained downside integration could cause more fear and panic, even among veteran equity investors.

03 – Covid-19 variant may further flare up
If the last 18 months are any sign, it is very likely that new variants and variants of Covid-19 will be discovered.Earlier variants of Omicron are said to be very low risk,
Infectious delta variants and their treatments, which are the world of viral mutations, are 100% unpredictable. This can mean a more negative trigger for short-term calmness and complacency. Even the 1918 Spanish flu had multiple waves.

04 – “Year when uncertainty becomes new certainty”
The global investment market is currently saturated with a variety of headwinds, including central bank behavior, the negative effects of pandemics, and overvalued markets.Derived expected volatility
The implied volatility index (or VIX) curve level was relatively high last year, remaining close to 20%. Compare this with the 27% return observed in last year’s Benchmark SPX-500 Index. The risk of rewarding is moving almost linearly, meaning that the market has enough warning signals ahead.

05 – Inflation is not temporary
In contrast to last year’s central bankers and inflation economists building the entire story of temporary inflation, the current rise in inflation has proven to be more tenacious than previously expected. From supply chain stagnation to a sudden explosion of demand during the post-pandemic recovery phase, the roots of inflation are firmly anchored to the ground, as seen in the current cycle. This is also the number one reason the Fed suddenly started shifting to hawkish tones.

The best opportunity

01 – Pivot for steepner trading
The market is currently fighting the expected rise in major US interest rates. What the United States does with money markets and bank interest rates has a huge impact on the global economy.Current state
Eurodollar futures contracts show the importance of the entire rising interest rate episode.

The spinning three-month Eurodollar futures have been revised from the high of 99.82 seen in July 2020 to the current low of 98.61. This suggests market expectations for a significant shift in interest rate trajectories.

It is time to enter into commodity trading, which is highly correlated with rising interest rates. This includes sectors such as finance, which have historically remained strong in a rising interest rate environment. By focusing on a shorter-term fixed income portfolio with the right yields, you can avoid the risk of being exposed to significantly longer durations.

02 – Value investment returns
Some of the best performing stocks in 2021 were behind the previous year. Equities in the energy sector, such as Halliburton (24%), Chevron (10%) and aviation giant Boeing (8%), outperform the top names in the Nasdaq 100 and FAANG indexes. Value investing as a theme could be further driven by a sudden shift to rising interest rates and continued movement towards the theme of “recovery and resumption”.

03 – Growth stocks dominate the average investor mindset, despite continued sales
Legacy growth names, which are part of the US Benchmark Index, incorporate a business model that is difficult for anyone to duplicate. These technology companies are also driving the global economy through physical devices or on-site / off-site products and services. The current dip can be seen as a more technical adjustment due to the market discounting new normals. This probably means balancing inefficiencies and high valuations in an over-expanded market.

04 – Blockchain and AI are becoming more relevant
Blockchain and cryptocurrencies have undergone a major paradigm shift in 2020-21. What started out as a fad is now slowly catching the interest of the average investor. Despite the 50% or more amendments currently seen in crypto, most institutional investors are still seeking diversification into legacy crypto, including Bitcoin and Ethereum. Due to the growing relevance of decentralized finance (or DeFi) and non-fungible tokens (or NFT), optimization and integration are progressing throughout the blockchain space. Use case-specific competitive cryptocurrencies such as Solano and Polygon may see a new wave of investors based on the underlying sentiment of the cryptocurrency market.

It also focuses on artificial intelligence (AI) and cloud computing. Almost every major industry in the world leverages the power of AI to enhance physical and network infrastructure to complement the work done by humans or to provide superior levels of skill sets and capabilities. It is completely replaced by.

According to the latest Gartner survey, more than 80% of companies surveyed in the technology and services sector expect to invest more than $ 1 million in AI over the next two years. While research on key AI use cases is still in its infancy, widespread adoption and integration of AI has the potential to increase traction and added value in this area.

05 – ESG investment continues to be in the limelight
Increasing the frequency of events related to extreme weather and social justice has contributed to the rise of ESG issues as a top priority for investors, businesses and policy makers. By November 30, 2021, ESG-focused funds around the world had an inflow of $ 542 billion and $ 285 billion to $ 649 billion in 2020 and 2019, respectively, according to Refinitiv Lipper data.

As a result, ESG funds now account for 10 percent of the world’s fund assets. In addition, the number of US companies voting in favor of ESG proposals increased from 21% in 2017 to 27% in 2020 and 32% in 2021.

Vijay Valecha is Chief Investment Officer of Century Financial.

Obtained from GBInvest February 2022 Edition