Current market situation
The end of the difficult first quarter of 2022 for the stock market was marked by a rather serious correction movement, which brought the main stock indices to the February 2022 highs. In mid-March, having held on to the horizontal support levels formed at the beginning of March last year, indices confidently went up despite the complicating geopolitical situation and in the hope that the main US financial regulators, led by the Fed, would soften the "hawkish" policy of increasing the discount rate in combination with a reduction of support for the current level of liquidity in the markets to a more moderate and smooth, and most importantly, meeting the current realities.
Key drivers of Q1 2022
1. Expectations of tighter U.S. monetary policy
Since November 2021 the rhetoric of the US Federal Reserve left no doubt about the impending tightening of credit and monetary policy. Beginning talks about possible changes in the policy towards its greater predictability and alignment of some non-market changes, by the beginning of the new year 2022 we saw a full-scale marathon of forecasts, in which the world's leading investment houses competed in the gloom of forecasts of tightening and raising of interest rates around the world. Some forecasts were so fantastic that they gave some doubts as to the adequacy of certain analytical or investment houses, but nevertheless, the general market sanction left no chance for soft Fed action. Strange as it may seem, the geopolitical changes, triggered by the conflict between Russia and Ukraine, made the "hawks" soften their rhetoric. Being afraid of excessive pressure on the market, taking into account the sanctions against the Russian Federation, which will inevitably affect the US and EU economies, the Fed moved to more accurate forecasts and actions, which resulted in a minimal change in the discount rate at the last quarterly meeting, which also gave some optimism to market participants.
2. "Overbought" securities
Overbought securities, which were one of the drivers of price declines in the beginning and middle of the quarter, forcing companies represented on the market to rapidly lose their capitalization, were replaced by a kind of "sobering up" from this "selling euphoria" by the end of the quarter. Market participants began to pay attention to discrepancies between share prices and their fundamental value, especially in the light of the release of Q4 2021 statements, which, especially in the segment of large companies, were demonstrating rather stable dynamics. The attempted recovery in portfolios of "oversold" stocks, as well as rebalancing of portfolios of large and mid-sized participants, caused an upward correction movement of the end of Q1, which has a continuation in the beginning of Q2 2022 as well.
3. COVID - 19
The influence of the main negative factor of the last two years - the COVID 19 pandemic - should not be written off. Market participants' anticipation of an early recovery of supply chains as the virus receded into the background was replaced by cautious pessimism when news from China in the middle of the quarter about the growing threat of a pandemic in that country. Aware of China's "zero tolerance" policy on the virus, market participants correctly assessed the risk of a slowdown in the Chinese economy which could be associated with the spread of virus activity in the country. The market assessed this risk as extremely significant and actively fueled sales sentiment. Closer to the end of the quarter, with news coming from China, it became clear that the threat of a pandemic, while posing a fairly serious threat, should not provoke panic due to its limited scope and fairly tight control by Chinese authorities on its non-proliferation.
Our opinion
As we noted in our previous review, the risks of the beginning and the middle of the quarter did not allow us to hold a position in equities above 30% of the placed funds. At the same time, we noted that the price level of a number of stocks seemed interesting to us and we considered them as interesting investment targets. We projected price stabilization and growth from the second half of March 2022, which was really reflected later on the open market and allowed us to strengthen our investments in securities.
Our main expectation for the stabilization and correction movement at the end of Q1 2022 is the resumption of initial public offerings by a number of companies, which moved them from early 2022 to early Q2 this year. Market volatility, high uncertainty on the dynamics of rates and the echoes of last year's trade restrictions have prevented a number of companies to implement their plans to enter the IPO market early in the year, but now, in our view, there is quite an interesting window of opportunity for them and showing some activity, these companies can implement their plans at an acceptable price for themselves and in the volume of interest. We understand that the market simply needed this break in initial public offerings. Having satiated with new companies, market participants no longer saw that price upside, which they were used to receive after offering of shares, and "tired" brokerage houses could no longer provide an acceptable level of liquidity in offering of new companies. All this led to "fatigue" of participants from the given market segment and a pause in offerings, undoubtedly, is able to reduce the level of this fatigue. Driven by "trending" areas such as the energy sector, new initial public offerings could revive the segment. Although we are far from various "conspiracy theories", we understand that the organizers of initial public offerings now need "beautiful deals" - strong placements, capable of drawing the attention of investors and redistributing their cash flows in favor of returning to the IPO market.
Where is the focus of our attention?
High-tech continues to be our focus. Having received a good "drawdown", a number of technology securities become interesting for strategic investors and we expect a number of large deals to be announced in Q2 2022, which will support this market segment and push its quotations up. The recovery of the retail sector and strong conjunctural expectations of the energy sector will also not go unnoticed by us.
However, we do not think that all negative news are over and markets will move rapidly upwards. Pressure on the US market from the Fed, complicated geopolitical situation, high European and Asian risks, all this continues to be under the close attention of our managers and will stop them from forming an aggressive fposition in the stock market at the moment.