Summary – November 2022

Rate hikes and their impact on economic growth and earnings were the factors that defined November. The aggressive actions of central banks so far this year have probably influenced capital markets more than anything else, including the war in Ukraine. Having been caught wrongfooted by persistently high inflation numbers, the Federal Reserve and its counterparties in the rest of the world have swiftly hiked rates during 2022 and stepped up the rhetoric that inflation must be defeated, whatever the cost to economic activity. This has led to intense discussions about whether it would lead to a recession and thus lower earnings next year.

Macro events took center stage

With the Q3 earnings season virtually over, markets in November were focused on macro events. Even though corporate results in the quarter held up well against a challenging economic backdrop, earnings revisions started to turn negative. Fears that next year will be characterized by slowing revenue growth and a contraction of margins made investors worry that equity market returns would be dismal, at least for the first half of 2023.

CPI surprised on the downside in November

However, inflation (as measured by the CPI) surprised on the downside in November. The market participants’ narrative then changed from inflation fears to growth concerns. But, on the very last day of the month, the Federal Reserve chairman, Jerome Powell, made remarks that were interpreted as a clear sign that the US central bank acknowledged the impact on the economy and that rate increases would be less aggressive going forward. This resulted in a massive rally in equity markets.

Widespread demonstrations over China’s “zero tolerance” policy 

Another area of investor focus and concern in November was China, where a rapid increase in outbreaks of Covid prompted the authorities to impose new lockdowns. The government’s strict “zero-tolerance” policy concerning the virus was increasingly met with discontent by large groups of the population. Demonstrations against the lockdowns and even president Xi himself were the most widespread in a very long time. Simultaneously, measures were taken to mitigate the problems in the Chinese property markets, and by the end of November, steps were taken to soften the restrictions. Somewhat counter-intuitively, the Chinese equity markets were the best performers globally.

Energy worries continued

The energy markets were still at the center of attention, this time on worries that a slowing world economy, not least due to the lockdowns in China, would dampen demand. The oil price fell significantly in November which prompted renewed speculation that the OPEC+ cartel would cut supplies further when it meets in early December.

World index increased in November

The world index increased in November for a second consecutive month. All sectors posted gains except for energy which fell back following an otherwise stellar performance so far this year. Materials and industrials led the advance, while consumer discretionary and information technology lagged the overall market. As far as the regions were concerned, all major stock markets noted gains with Europe outperforming the US. Another market well ahead of all others was Hong Kong, which saw its benchmark index surge in November, more than offsetting its double digit decrease in October.

OUTLOOK

The market is ambivalent. Will the already evolving traditional seasonal strength continue as a result of the now receding peak inflation fears and will a period of calmer waters continue to lure investors back into equities? Or will we fret about the fourth quarter reporting season starting in January and see this as a golden opportunity to sell?

The market divides strategists

The strategists are clearly divided and market participants are hesitating to choose which path to follow. Our take is the following. It is likely that the market strength will continue for some time. However, it could quickly become very volatile depending on the incoming data. It seems to us that the market frequently trades good news as bad news and moderately bad news as good news, if the data is supportive of the narrative of easing macroeconomic conditions further down the road.

Potential implications for the sector

This has some important implications for the healthcare sector and we believe mostly towards the upside. Service companies need a reasonably stable economy. Pharmaceutical companies are not so expensive, with a few exceptions, but need political stability which is likely with a divided congress. Biotechnology companies could outperform in a recession but need stable financial markets in order to have access to capital and a good mergers and acquisitions environment. Lastly, medical technology companies need optimistic and productive healthcare providers who are not only dependent on the labor market, but also on a calm interest rate environment in order to invest and expand.

Most of the above seem likely to play out even in a light, and hopefully short, mini stagflation period. We are therefore cautiously optimistic about the immediate future. We are, of course, aware that this optimism is also the current market sentiment and could turn upside down if the economy slides into a classic recession. In such negative market conditions, pharma and biotech are likely to be relative outperformers.