Current market situation
In the last few days, we have witnessed significant movements in the global capital markets. The main reasons are the recently announced interest rate hikes and the current geopolitical situation in the Ukraine.
In principle, raising interest rates is a sign that an economy is doing well. In the current case however, the interest rate hikes by various central banks are based on the fact that there is above-average inflation in many countries. On the one hand, this is due to the loose monetary policy of the central banks during the Corona crisis, and on the other hand to the disruption of international supply chains triggered by the Corona crisis. For example, a shortage of goods with a rising money supply leads to rising prices.
Higher interest rates mean higher financing costs for many companies. This particularly affects companies that still have to invest a lot of capital in their growth, so-called “growth” stocks. For this reason, these stocks that are being hit hardest by the current market correction. Another point that currently worries market participants is the uncertainty about the velocity and extent of the announced interest rate hikes.
At Everon, we are watching the markets closely and believe that market participants are currently overreacting, as economic data has been very positive, especially over the past year. To some extent, we can also assume that some players in the market now want to realize the extraordinary gains of the last stock market year and sell their positions. An interest rate hike is basically a normal process that was bound to happen again sooner or later. The low interest rate environment has already become normal for us from a psychological point of view.
Sell-off largely limited to equity markets
Looking at other markets, we can clearly see that the current situation is not comparable to the early 2020s. Credit spreads on corporate bonds remain unchanged at a low level. Credit spreads can be seen as the risk premium that companies have to pay on their debt financing to compensate lenders for the risk of default. This is a good indicator of the overall economic health of companies.
How Everon reacts to the current market situation
We have chosen not to hedge our portfolios, because it is very costly and we see limited benefit in doing so. Instead, we reallocate within the portfolio to more stable industries and prepare to take advantage of opportunities as they arise during the inevitable recovery phase. As it is scientifically proven that about 80% of the return is explained by the strategic asset allocation, we would like to stick to it. So far, this has paid off in the medium to long term.
Therefore, it is important to remain calm in this turbulent market phase and not to be unsettled by short-term losses. Corrections, such as those we are currently seeing, are completely normal, especially against the backdrop of the recent extremely positive stock market years. And these also have a decisive advantage: they are the best times to invest additional capital. As long as nothing has changed in your financial situation or your risk profile, we are still on track for the long term with your current strategy.
