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International Equity Markets Commentary

Market Vitals

  • Global markets pulled back in January, hampered by Omicron and expectations of tighter monetary policy, following strong gains in 2021.
  • Cyclical sectors fared the worst in January as rising inflation challenged lofty valuations and tempered forward-looking growth expectations.
  • Economic recoveries, inflation and shifting monetary policies vary widely from country-to-country as the world continues to recover from the pandemic.

Market Summary – A Volatile Start to 2022

Global markets, as measured by the Morningstar Global Markets Index, dropped roughly -5% in January, as the Omicron wave and inflation concerns broadly challenged global equities. Losses could have been more substantial, but a month-end rally driven by oversold conditions mitigated some of the weakness.

In Europe, stocks in Sweden and the Netherlands dropped double digits, down -12% and -10%, respectively. Swiss stocks were also weak (down -7%). Russian stocks fell -6% due in part to escalated tensions with Ukraine and the West. Losses were muted in the UK, with stocks down just -0.8%. In Asia and the Pacific region, Chinese equities were down -2%, stocks in Japan fell -5%, and stocks in Australia and South Korea were down -9% and -10%, respectively. Brighter spots included Latin America, where Brazilian equities advanced 7%, and the Middle East, as stocks in Saudi Arabia and Qatar advanced 7-8%.

From a sector perspective, technology and health care stocks fared the worst. Global technology stocks were down -8%, largely reacting to inflationary pressures in the US and elsewhere, while health care names also declined -8%. Consumer discretionary and industrials declined -7%. Conversely, energy stocks advanced more than 12% in January, stoked by inflation and rising oil prices. Financials, another sector that typically fares well during rising rate environments, posted a slightly positive return in January of 1.1%. All other sectors declined between 2% to 6%.

Exhibit 1 – January Total Return for Major Markets


Exhibit 1

Source: FactSet, Morningstar Global Markets Index.

Coronavirus – The Omicron Wave

The Omicron variant, which emerged in late November, continued to ripple globally, putting pressure on hospital systems and economic recoveries. Some countries reverted to lockdown restrictions seen in the early days of the pandemic–Japan instituted more restrictions from January to mid-February due to rising cases–while other countries, such as Denmark, Austria and the UK, started easing restrictions as hospitalization rates dropped later in the month.

Inflation & Monetary Policy – A Mixed Bag

In addition to pandemic-related headwinds, rising inflation in many countries has increased concerns about consumer spending and the sustainability of economic growth. Given that the world’s major economies are at various stages of economic cycles and experienced different levels of government support throughout the pandemic, it’s not surprising they are moving at different speeds in terms of recoveries, pulling back on pandemic-induced stimulus, and raising interest rates.

For example, inflation in the UK hit a 30-year high in January, following the Bank of England’s first interest rate increase in December, while China’s central bank cut its key lending rates for the first time since early 2020 to support lagging growth in the fourth quarter, which was driven by a decline in the property market and new Covid outbreaks.

Exhibit 2 – Current Inflation Rates in Major Markets


Exhibit 2

Source: OECD (2022), Inflation (CPI) (indicator). doi: 10.1787/eee82e6e-en (Accessed on 28 January 2022).

GDP Growth – Fits & Starts

Global GDP growth estimates were revised downward for 2022 partly attributed to fresh concerns from coronavirus variants and higher inflation. The 19-nation eurozone economy decelerated sharply in Q4 (growth of 0.3%, down from 2.2% in Q3), but was in line with expectations. Growth in countries including Spain, France and Italy—thanks in part to a rebound in consumer spending as Covid restrictions were eased–offset contractions in Germany and Austria where Omicron and renewed lockdown measures impacted progress.

In contrast, China’s Q4 GDP grew 4%, contributing to the country’s strongest annual growth in nearly a decade, with full year 2021 economic growth of 8.1%. In the US, the economy showed strength in the final three months of the year, bringing annual GDP growth in 2021 to 6.9%. Overall, global economic growth is expected to be muted in 2022 compared to last year, as pent-up demand wanes and monetary support is unwound to contain inflation.

Exhibit 3 – Real GDP Estimated Percent Change


Exhibit 3

Source: International Monetary Fund, World Economic Outlook Database, October 2021.

Morningstar Global Markets Index measures the performance of the stocks located in developed and emerging countries as across the world. The index is unmanaged, market capitalization weighted, includes net reinvested dividends, does not reflect fees or expenses, and is not available for direct investment.

The views expressed are those of Diamond Hill Capital Management as of February 2022 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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