Investment Idea

Is this the bottom for risky assets?

Mikael Syding
04/07/2022 | 4 min read

I think we are very close to a temporary bottom for risky assets such as stocks and cryptocurrencies. When the reporting period picks up in July and the figures show that companies are nevertheless left with relatively steady revenues and profits, this could give rise to a relief rally for the stock market.

I think we are very close to a temporary bottom for risky assets such as stocks and cryptocurrencies. When the reporting period picks up in July and the figures show that companies are nevertheless left with relatively steady revenues and profits, this could give rise to a relief rally for the stock market. It could pull the cryptocurrencies upwards. If you compare the Swedish companies 'statements with the analysts' expectations, the conditions are good for positive surprises. Hennes & Mauritz, which has broken its financial year, has already shown the way, even though the company's rather strong report was met with only lukewarm enthusiasm.

When the engineering companies soon present their currency-doped reports, as well as the banks that their business models have not been affected by rising interest rates, economic slowdown or house price falls (yet), their low price / earnings (P / E) ratios and high direct returns could attract troubled investors. With both a bank and a workshop as a locomotive, it is easy for the rest of the stock exchange to keep up. Then the FOMO (Fear of missing out) train with short coverage and hunting for bombed-out stock rockets could drive a classic intensive rally before reality catches up. The reality is high inflation, continued rising interest rates, reduced consumption space for private individuals with rising housing costs and falling revenues and margins for companies when the recession finally takes hold. It is difficult to get away from the fact that this is where we are heading this autumn. In the short term, it probably matters less, because now there is a long way to go until the next interest rate hike and the recession is not here yet - maybe it will not even come sometime. And when it's so tough for both the economy and the stock market, maybe you can dream that the central banks will soon take a break. I think such dreams turn out to miss the mark, but during the reporting period, hope can still gain a foothold and have an effect on the stock markets during some hot summer weeks.

Many people I talk to, not to mention financial twitterers, seem to focus on a market bounce only in August. Among other things, this is what increases the probability of a FOMO rally as early as mid-July. If the upswing starts earlier than most people expect, a kind of panic is quickly created about being left behind.

In addition to loose scenarios of an imminent broad market rally, followed by another sharp decline phase the next time interest rates are raised further and the threat of recession is manifested more and more clearly, I think we should take a closer look at the oil sector. The price of oil is driven partly by the balance between supply and demand, and partly by war-related embargoes against Russia. Due to the fact that the ESG movement's measures have led to too little investment in new oil production (and nuclear power) while the expansion of solar and wind power requires that there is a certain amount of steady base power per amount of renewable energy production, there is a shortage of oil for several years. The situation is made even worse by Russia's aggressions against Ukraine with subsequent import bans for oil and gas in several European countries. At the same time, OPEC this time seems to welcome high prices for repairing its broken state budgets. This is likely to be the case with much higher oil prices in the coming years. $ 150 could very well be the new "$ 100". In that scenario, the oil companies' profits will be extremely high. Russia also by the way, because there is always someone to sell to the back road. The Russian ruble speaks its clear language, i.e. that Russia's economy is doing better than ever thanks to the war and thanks to sanctions. Furthermore, in view of the winter heating needs, Russia seems to want to use natural gas and oil as a means of pressure on Germany for political concessions. Germany, which is dismantling all its nuclear power, in stark contrast to France's strategy, is in a particularly bad position and will pay exactly what it takes to keep its inhabitants warm and the car factories running.

A company like ConocoPhillips (COP) has e.g. has already fallen from 124 to 90 dollars, despite the fact that the conditions for a very high oil price have only improved. In addition, prices of $ 110-120 per barrel were never included in the share price. At the moment, it is probably the concern about a recession and perhaps also about an end to the war that means that the oil sector has been sold off together with the rest of the market. It looks like a real mistake, the oil companies are unusually cheap now, especially considering the risk of a protracted conflict with Russia and that we within a couple of months are approaching the end of the holiday (back to work) and then the winter cold. The ruble may be used as a leading indicator of oil prices (or vice versa). In any case, the oil sector's unloved position, single-digit profit multiples and large upside in the raw material's supply / demand dynamics. This applies in particular to an inflationary environment with rising interest rates that drives a sector rotation out of expensive technology stocks and other pandemic winners into sectors with clearer values here and now. There, energy is hard to beat. If you dont want to select individual shares, there are always products that provide a broad sector exposure, and if oil feels dirty, Vontobel also has, for example, instruments focused on hydrogen.

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