#54 Weekly Charts — International & Fed hiking Cycles


Topics of the day:

  • International Markets
  • Returns during Fed Hiking Cycles

International Markets

Morgan Stanley

“On a regional basis, we expect potentially solid economic growth across developed economies in 2022, albeit at a slower pace than the recovery-driven levels seen in 2021.” London — The increase in market volatility, driven by the omicron variant, is another reminder that navigating global equity markets is likely to remain challenging in 2022. We believe, however, that higher-quality companies, particularly those in international markets, may offer active managers attractive stock selection opportunities.

Along with COVID variants, countries and companies must contend with slower economic growth, ongoing supply chain issues and stubborn cost inflation. While uncertainties and risks persist, we think quality companies with consistent earnings growth and well-established market positions may be better equipped to withstand enduring pricing and supply pressures. Moreover, in view of stretched U.S. stock market valuations, and the fact that international stocks have lagged the U.S. for more than a decade, we think the reins of market leadership may pass to international stocks in 2022.

Time for a Shift in Market Leadership? After an extended period of outperformance by U.S. equities dating back to the global financial crisis, we expect international equities may outperform in the coming years, driven by: „ More supportive fiscal and monetary policies in Europe and Japan. „ Real yields rising more in the U.S. than in international markets, pressuring U.S. equity valuations in general, and U.S. growth stocks in particular. „ Attractive valuation levels — international equities trade at a multi-decade, extreme discount relative to U.S. equities.

World Bank


Growth in the East Asia and Pacific (EAP) region is projected to slow to 5.1 percent in 2022. While growth in China is forecast to ease to 5.1 percent amid tighter regulations and diminished support from exports, that in the rest of the region is projected to accelerate to 5 percent in 2022, buoyed by the release of pent-up demand and accelerated COVID-19 vaccination. In about one-fifth of countries — most notably in tourism-dependent economies — the projected recovery will not be sufficient to return output to its 2019 levels during the forecast period. Downside risks to the outlook include recurrent mobility restrictions in the context of pandemic resurgence and incomplete vaccinations, heightened financial stress, and disruptions from natural disasters.

Merrill Lynch Capital Market

More Durable — Based on the events of the last few decades, it is clear that the S&P 500 has proven to be a more durable asset class compared to similar riskier investments. Looking at the last four recessions, the S&P 500 tended to perform better on average during the recession and 12 months after the start of the recession compared to its global peers and commodities.


Ehiwario Efeyini, Director and Senior Market Strategy Analyst The U.S. and its allies have announced new trade, investment and financial sanctions on Russia following President Vladimir Putin’s order to move troops into two separatist regions of eastern Ukraine and recognize their independence. These steps mark a major escalation in the Russia Ukraine tensions that have been brewing over recent weeks and add more uncertainty to an already volatile start to the year for global investors. Past experience from Russia’s 2014 annexation of Crimea suggests that markets closest to the epicenter of the conflict are likely to see the most significant effect from this escalation, with little lasting impact on the rest of the world.

Russian Equity and currency markets were the hardest hit eight years ago, but U.S., European and other emerging markets were higher over the 12 months following the start of Russia’s military operations. However, we acknowledge the key differences in the current environment that could potentially broaden the near-term market implications this time around. High energy prices (particularly in the absence of a supply response from other major global producers) and Russia’s deeper ties with China may act to reduce some of the West’s leverage over President Putin. And against a backdrop of elevated inflation in the U.S. and Europe, the potential for any disruption to Russian energy supply could add greater uncertainty to the monetary policy outlook in the major developed markets.

Returns during Fed Hiking Cycles

Goldman Sachs Asset Management

European equities offer an interesting mix of cyclical exposure and secular growth. That will be important as inflation replaces deflation as a key risk and a world of quantitative easing gives way to one of quantitative tightening. We expect this shift to support some further re-rating of value sectors in the market over the next year or so.

The MSCI Europe’s high concentration of cyclical sectors (~75% according to MSCI’s classification) and value-style stocks (>50%) lead us to believe these indices may do well in this environment. Historically European equities have delivered positive returns when the Fed hikes rates. This has been particularly so once the Fed has begun on a steady and gradual hiking process.

On average, the MSCI Europe returned 16% annualized during Fed hiking cycles, which is well above the 6% average annual return of the past 20 years. This seems to be mainly a function of the European indices’ high concentration of stocks less sensitive to interest rate moves.

We think the changes to the sectoral composition of European equities over the past decade (illustrates this for the MSCI Europe) make them uniquely positioned to benefit from the broadening of the digital revolution across industries and the increased focus and spending on decarbonisation. The short-term re-rating in value stocks as economies continue to reopen and rising interest rates put pressure on longer duration stocks should also benefit European equities.

Figure 3 illustrates how valuations in Europe, as measured by the 12-month forward PE ratios, are much lower than those in the US. This is largely due to differences in the sectoral compositions of the two stock markets. Ever-lower bond yields have boosted the valuation of longer-duration equities in sectors such as technology at the expense of shorter-duration equities like value stocks over the past 10 years. The result: extremely low valuations in markets like Europe that are heavily weighted toward cyclical or traditional value industries and high valuation in technology-heavy markets like the US.

But even after adjusting for the differences in sectoral composition, valuation gaps between the two markets remain significant. This suggests that, while the US equity market should still perform well, there is more room for rising valuations, on a relative basis, outside of the US. We think that European equities offer attractive value, particularly for investors trying to reduce exposure to the most expensive areas of the market.

Marubeni Research Institute

Consumer prices rose significantly in both developed and emerging economies in 2021 and are currently above pre-Covid levels. Not only are such energy prices as crude oil and coal rising but also prices for raw materials like metals, minerals and food and are spreading to a wide range of other items as well. In particular, in low-income countries food accounts for a large portion of the consumer price index which has a large impact on daily life.

The Federal Open Market Committee (FOMC) decided to leave the policy rate (FF) unchanged and accelerate curtailment (tapering) of its quantitative easing. New purchases of financial assets are expected to end in March 2022 and the FOMC members’ forecast suggested there would be 3 rate hikes during the year.

At a press conference, Fed Chair Powell was repeatedly asked about maximum employment, which is a condition for further policy normalization. However, that standard has not yet been stated. At the moment, the impact of rising wages is limited, but he said it will be a key point going forward if rents rise.

The balance sheets of the central banks of Japan, the U.S. and Europe have expanded significantly due to the large-scale monetary easing measures used during the pandemic. The supply of funds has flowed into financial assets (stocks, bonds, etc.) commodities, real estate, etc. Attention should be paid to the market impact of the curbing or ending of ultra monetary easing measures in each country, like the end of new purchases of financial assets by the U.S. FRB and expected interest rate hikes in 2022.

My conclusions and considerations

International Markets

  • What I think is that right that the US Market is the first one to consider during recessions, drawdowns in general, fundamentally even for how the base currency like USD perform during these times.
  • But International Equities trade at a multi-decade, extreme discount relative to U.S. equities, and could be an attractive valuation levels.

Here you can find an other article about it: International equity return

Returns during Fed Hiking Cycles

  • In my view we are entering in a new era of the markets and exiting out about by another one.
  • We are entering in an era where the central banks are ready to increase the interest rates and where inflation is growing from not a few months as the central banks has thought using the word “Transitory”
  • Historically European equities have delivered positive returns when the Fed hikes rates.
  • European equities offer attractive value, particularly for investors trying to reduce exposure to the most expensive areas of the market.

Here you can find other articles about it:

  1. Inflation winners and losers
  2. Inflation above 4%
  3. Interest Rate and Inflation Expectations
  4. Spread CPI vs PPI

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics and in doing so he shares with you the most interesting charts and comments.


This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.