What will change on the markets after the Fed tightening
The Fed continues to tighten rates: what will happen to the markets? The analysis of Christophe Nagy, Fund Manager Comgest Growth America of Comgest
2022 was the year of rate hikes. After the 2020 pandemic and 2021 stimulus measures, leaders sought to “normalize” the economy in 2022. This monetary tightening aims to slow inflation, which has nearly double-digits in several major economies, hitting the purchasing power of vulnerable households, leading to labor disputes and exacerbating supply problems.
While monetary tightening typically has a delayed impact on economic factors, its impact on asset valuation was immediate.
THE MACRO FACTORS
The macro factors slowing the return to “normalcy” are well known, ranging from the war in Ukraine to the persistent Covid pandemic, to attempts to bring supply chains back within national borders and to invest in renewable production.
However, monetary stability is desirable, since speculative "bubbles" divert talent and funding from productive activities and penalize the most vulnerable savers. Following the rate hike, companies are prioritizing high-yield mission-critical manufacturing investments to "do more with less."
ELI LILLY, JOHNSON & JOHNSON AND OTHER STRONG TITLE
Eli Lilly, a top five position, was the top contributor to 2022 performance. The company innovated its diabetes medicines portfolio, where it shares market share with Novo Nordisk. A breakthrough in diabetes treatment has led to a new adjacent market, that of obesity management, where Eli Lilly's drug has demonstrated a breakthrough ability to reduce body weight by up to 22%. The company's pipeline also contains a potential breakthrough drug for Alzheimer's disease, for which there is a far-reaching and unmet critical need.
BioMarin, a midweight stock, was also a significant contributor to 2022 performance. The company made advances in drugs for the treatment of dwarfism and hemophilia, thanks to its leading platform in gene therapy and orphan diseases.
Another notable contributor to performance for the year came from Johnson & Johnson. The planned spin-off of the company's Consumer division is drawing attention to the higher-growth, higher-margin pharmaceutical and medical technology segments.
Service Corporation, a small and mid-cap leader in US funeral services, was one of the most resilient portfolio stocks this year. The company provides essential services and does well in a fragmented market.
Intuit continues to benefit from the growth of entrepreneurial activities. In the United States, business start-up applications surpassed 400,000 per month in 2022, double from a decade ago and more than 40% higher than in 2019.
WHAT WILL HAPPEN IN THE MARKETS IN 2023, BETWEEN CENTRAL BANKS AND INFLATION
2023 will likely see a continued push and pull of central banks on inflationary trends. Although there are signs of a cooling, we are still a long way from the goal set by the US Federal Reserve , which is to achieve 2% inflation and a less rigid labor market.
Businesses also continue to pass prices on to consumers to offset inflation, testing their resilience and making a dent in the savings glut built up during Covid. While we have recently seen sharp declines in freight rates and oil prices, it is still too early to tell what the “natural” levels will be and how quickly they will affect consumer prices.
A rationalization of the workforce by companies (e.g. Snap, Shopify, Salesforce and Goldman Sachs) has begun, which should help some of the market-leading companies in the portfolio compete for talent in a less inflationary environment.
We continue to look for market-leading, innovative, well-managed companies that provide essential services and are currently being overlooked, usually due to a short-term view. We aim to build positions incrementally, to minimize errors, and to hold them for as long as possible.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/cosa-cambia-mercati-stretta-fed/ on Sun, 29 Jan 2023 06:43:47 +0000.