Without a doubt, 2022 is being a very complicated year for all investors as reflected by the American indices with falls of more than 20% in just three months: concerns about the conflict in ukraine and the inflationary pressures They are being responsible.
In relation to the situation in Ukraine, unfortunately no one knows how long it can last or how far the parties involved are willing to go, but what is clear is that in a world as globalized as the current one, in which there is a dependency between all economies, this conflict does not favor anyone and is unsustainable. And this is precisely what makes me think that in a short time, we will have more optimistic news.
Fed announcement
On the other hand, today, March 16, will be a crucial day that every investor has marked on their calendar and that will have a strong impact on all markets and currencies: the announcement by the Fed (Federal Reserve) after its meeting two days.
For months, the forecasts of the large investment banks that estimate seven or more rate increases throughout the year to curb inflation, starting today with a rise of 50 basis points, are causing great fear among investors.
Personally, I still maintain the idea that The Fed will raise rates a maximum of 4 times during 2022, and the increase that will be announced today will be 25 basis points (not 50).
Despite the current uncontrolled inflation, I think the Fed will be very “dovish” and very careful both in quantity and in pace of rate increases for many reasons:
- It implies a higher financial cost to repay your debt, something that is obviously not of interest with the current deficit record from the USA.
- With growth forecasts cut, an aggressive rise would lead to a recession.
- With the mid-term elections in the US at the end of the year, Biden will have special interest in arriving in the most optimal situation possible to run a good campaign.
If the Fed announces a cautious roadmap, as I predict it will, markets will wildly celebrate.
Although in recent weeks we have been surrounded by negativity and pessimism, it is worth remembering the great strength of the underlying fundamentals of the American economy: business results, labor market (unemployment rate at 3.8%), household income and consumer demand, accompanied by a lot of liquidity in the markets and interest rates at historically low levels (and therefore, a lot rise margin).
It is very difficult to see the light at the moment, but as history shows us, markets recover quickly after a crisis like the current one. As uncertainty clears, rationality (rather than panic) will return to the markets and companies will adjust to their real value.
We are seeing a lot of sectoral rotation in the markets, but not outflows of capital flows, which is very positive. I am clear that We must remain logical and rational and not panic, which would lead us to make wrong decisions.. Maintaining objectivity is the most valuable skill for an investor, and it will pay off over time.
It is worth remembering that although an inflationary environment is complicated for consumers, companies with competitive advantages can benefit since there is greater interest in quality goods or services even if their prices are higher than average. Therefore, The best coverage in an inflationary environment like the current one is to invest in companies with solid fundamentals that are capable of transferring their higher costs to the sales price. In addition to diversifying sectorally, we must also do so in the type of assets such as private companies, real estate, cryptocurrencies or collectibles.
My recommendation is to take advantage of these falls to buy those opportunities that the market offers us and maintain a long-term approach since everything will fall into place when the dust settles.
«Be greedy when others are fearful»
Dan Benbunan
Portfolio Manager
