- Global Investment and Multi-Asset Strategist
- Global Investment and Multi-Asset Strategist
United Kingdom, Institutional
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
What a difference a few weeks can make in the equity market! The sharp, swift sell-off through the first month of this year is raising some difficult questions for investors, chiefly: Are we just witnessing a long-overdue short-term correction in the more speculative areas of the market, or perhaps something more fundamental (and enduring) that could portend a broader unwinding of equity risk?
My take: I suspect the market is in fact in the midst of recalibrating to a new environment where liquidity is going to be tighter, real interest rates higher, and corporate profits a bigger driver of share prices. As my colleague Trevor Noren suggests in his latest blog post, Value versus growth: Expect volatility more than a smooth transition of leadership, this potential “regime change” is likely to show up in sporadic and sometimes violent reversals of the multi-year outperformance of momentum and growth equity factors.
In that vein, I expect the nascent rotation from growth stocks to their value-oriented counterparts (Figure 1) to continue and think now may be an opportune time for investors to consider upgrading their equity portfolios to higher-quality companies that have taken significant market hits but are growing their revenues and profits.
Figure 1
Five key points about the recent sell-off
- Bubble-like conditions: Extremely easy financial conditions in the post-pandemic era amid accommodative monetary and fiscal policies supported a “risk-on” market environment that, in my view, became largely divorced from underlying fundamentals in many instances. The meteoric rise in bitcoin, SPACs, “meme” stocks, IPOs, and high-flying growth companies was a dynamic where many of the most richly valued risk assets outperformed cheaper ones. In 2021 and into 2022, that trend has clearly begun to reverse (Figure 1). As of this writing, the recent underperformance of growth-style equities has been concentrated mostly in the frothier parts of the market — for now anyway.
- Geopolitical turmoil: A new exogenous risk that equity investors must contend with is the potential for military conflict between Russia and Ukraine, which could trigger a spike in oil prices, feed into higher inflation, and damage the global cycle. Notably, 40% of Europe’s gas supply and more than 50% of Germany’s comes from Russia. While the risk of a Russian invasion is tough to handicap at this juncture, I do think it implies a higher probability of a “stagflationary” global economic outcome.
- The Fed factor: The equity market is still in the process of adjusting to the US Federal Reserve’s (Fed’s) new playbook of sooner, more aggressive monetary policy tightening, starting with tapering its large-scale asset purchases, to be followed quickly by interest-rate hikes and balance-sheet “runoff” later this year to control US inflation expectations. Real rates are rising, liquidity is tightening. High-flying stocks that are trading at multiples of sales (rather than earnings) are bearing the brunt of the market sell-off, but longer-duration tech companies (which dominate the major indices) with distant, less certain earnings prospects are also in the crosshairs.
- Omicron’s impact: This latest variant of COVID-19, which I addressed in a December 2021 blog post, has swept across the world relatively quickly, although case numbers have been falling in the US, the UK, and parts of Africa. Omicron-related labor shortages and supply-chain disruptions should be relatively short-lived, in my opinion, allowing COVID’s negative market impacts to (hopefully) gradually fade in the months ahead.
- Recession risk: Global monetary policy remains loose (as reflected in negative real rates), with some central banks not tightening yet (and even the Fed apt to hold off if markets tank), while household and corporate balance sheets are generally strong. The main risk is that of a potential policy mistake where the Fed could tighten too much or too fast and tip the US economy into a recession. I am also monitoring consumer behavior, along with China’s economy as authorities there maintain their “zero-tolerance for COVID” stance.
Investment implications
Expect higher market volatility: After a period of plentiful fiscal and monetary liquidity due to the pandemic, the specter of less liquidity going forward may continue to weigh on markets, especially stocks of companies that have relied on liquidity rather than earnings for multiple expansion.
Think about upgrading your equity portfolio: With this month’s market sell-off, many investors are finding opportunities in higher-quality companies with growing revenues and profits at potentially attractive entry points.
Diversify your equity exposure: Investor portfolios appear to be still biased toward growth equities, as the market share in large-cap growth mutual funds is currently around twice that of value funds (according to Morningstar). Asset allocators should consider shifting some of their growth exposure to value, where (as noted) I expect continued outperformance.
Respect the possibility of regime change: No one can know if “this time is different,” but given today’s backdrop of higher, “stickier” inflation, policy tightening, and geopolitical risks, I believe it is prudent to be prepared for that possibility and to favor real assets, value-oriented equities, commodities, floating-rate credit, and TIPS over US Treasuries.
Expert
Related insights
Showing
of
Insights Posts
What the yen carry trade unwind could mean for markets and the Fed
Continue reading
7
min
Article
2025-09-30
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Time for bond investors to take the wheel?
Volatility makes bond investing less straightforward, but it can also create opportunities, provided investors are in a position to "take the wheel" in order to capitalise on them.
8
min
Article
2025-11-30
EMEA Investment Forum 2024: highlights
In this short video, we share highlights from Wellington's 2024 EMEA Investment Forum, where our Wellington experts and guest speaker explored how to “Rethink the future".
2
min
Event replay
2025-11-30
An active investor’s guide to growth equities
Our experts offer their view on the current economic environment, explore best practices for investing in high-quality growth equities, and highlight where they see opportunity now.
6
min
Article
2025-09-30
What the yen carry trade unwind could mean for markets and the Fed
Brij Khurana explains why market participants are likely underestimating how foreign ownership of US assets could constrain the pace and magnitude of the Fed’s cutting cycle.
7
min
Article
2025-09-30
CLO equity insights: Private credit
Explore how the convergence of public and private markets is impacting CLO equity, including the unexpected benefit it has driven in recent years.
5
min
Article
2025-08-31
Massive market sell-off: Justified or an overreaction?
What's behind the global market meltdown, and what should investors consider doing? Global Investment and Multi-Asset Strategist Nanette Abuhoff Jacobson shares her views.
3
min
Article
2025-08-31
Time for credit selection to shine
Fixed income investors continue to seek answers to an era of volatile rates. Large, static exposures to credit markets no longer cut it. Instead, a nimble and dynamic approach is more likely to create resilient and consistent total return outcomes.
5
min
Article
2025-07-31
Sustainable Investment Outlook
Our head of Sustainable Investment shares key areas of focus for 2023, including climate change and biodiversity, modern slavery, data privacy, shareholder rights, and impact investing,
Article
2024-12-31
The growing importance of supply chain transparency
Head of Sustainable Investment Wendy Cromwell explains why supply chains remain a key investment risk and details related research areas for our SI team in 2024.
2024-12-31
Long/short investing in European equities' growing dispersion
We explore how growing dispersion in European equity markets is driving opportunities for long/short investors, fueled by structurally higher inflation, changing market leadership, and a renewed focus on valuation.
Article
2024-09-30
Core fixed income: Stop me if you’ve heard this one before
Head of Multi-Asset Strategy – Insurance and Portfolio Manager Tim Antonelli updates insurers on the status of the market today, shares what he believes they can expect for the rest of the year, and identifies areas that may be worth a closer look.
Article
2024-07-31
URL References
Related Insights