“The V-shaped recovery is dead” and the bottom of the current bear market “could arrive later this year or far away as the first half of 2023,” said Saxo Bank in its preview of the third quarter, backing defence, commodities
Following a relentless bull market over the past dozen years, investors are slow to update their views from the buy-the-dip mentality ingrained over this period, said Peter Garnry, head of equity strategy at the bank.
As this behaviour has continued in recent months, though the dips get bigger and the rallies get smaller, “we observe no material change in behaviour among retail investors, which is also why this equity market has more room to fall”, Garnry warns.
“The past six months have seen the biggest shift in market sentiment in a lifetime and in Q3, the outlook for global companies’ earnings is not good.
Based on the best guess from the Danish bank, that the S&P 500 will correct around 35% from its 4,818 peak, that suggests the bottom of this bear market “could arrive later this year or far away as the first half of 2023″.
In the meantime, the Saxo team said they expect commodities and defence stocks to continue doing well until equities hit bottom.
“The bear market will likely not exhaust itself until the new generation of investors that went all-in on speculative growth stocks, Ark Invest funds, Tesla and cryptocurrencies have fully capitulated,” Garnry said.
With tech stocks having prospered amid rock bottom interest rates, inflows from ESG funds and expanding margins, while energy stocks suffered from low returns on invested capital, “now things are reversing as the world realises that it still runs on diesel and gasoline,” says Garnry.
“For every percentage point that the energy sector is getting relative to the other sectors, ESG will be under more pressure on performance, and the resurgence of fossil fuels could cause a crisis for ESG funds suffering from outflows over poor performance and lack of exposure to natural resources amid the new age of inflation.”
After commodities reached a new record high in the past quarter before running out of steam amid global growth concerns, Saxo’s commodities team is continuing to watch the ongoing themes of Russia’s willingness to continue with the war in Ukraine, Chinese economic growth, the strength and speed of US rate hikes, as well as how much demand is affected by rising prices.
“With millions of tons of grains still stuck in silos just weeks before the next harvest will require the storage space, the outlook for food prices will depend on the level of crop-friendly weather around the world and whether a corridor allowing exports of Ukraine crops will be established,” says Ole Hansen, Saxo’s head of commodity strategy.
Gold is expected to move higher in light of the high risk of continued turmoil in global financial markets from the transition towards higher interest rates, while China remains the “major unknown” for industrial metals, Hansen adds.
“Copper, rangebound for more than a year, risks breaking lower before eventually reasserting its long-term bullish credentials.”
As for oil, Hansen said: “We suspect corrections in the energy market during the second quarter may end up being short-lived, with the risk of a prolonged period of high prices the most likely outcome.
“A brief return to the 2008 record high cannot be ruled out, but in general we believe that some emerging demand weakness on the other side of the peak summer demand season should keep prices capped within a wide $100-to-$125 range.”
Cryptocurrencies is also at a potential pivot point, according to Saxo, with recent months seeing the highest ever correlation between the tech giants of the Nasdaq-100 index and bitcoin.
“Thus, crypto investments are behaving more as regular high-risk assets with similarity especially to tech stocks,” says senior quantitative analyst Anders Nysteen.
“During these times of high correlations, cryptos are less likely to add any diversification to a portfolio to spread out risk.”
With crypto also having calmed down, stakeholders are divided in their outlook for the next couple of months, reckons Nysteen.
“The cryptocurrency space is screaming for a proper regulatory framework and the clean-up of the industry may just have started as the US and EU are expected to announce a regulatory framework around digital assets, which turn out to be stricter than originally expected.
“Pessimists see 2022 as the beginning of a crypto winter, where lower crypto prices and reduced engagement in crypto applications will decrease hand in hand in a negative feedback loop.
“On the other hand, optimists hope for a positive spiral if the investment appetite in cryptos increases, driving up the price and eagerness to engage in crypto technologies. They see the bear market as an opportunity to prepare for the next bull run and as a healthy clean-up of the crypto space, which can bring back some of the stability and reliability that were lost during the first half of 2022.”