Global stock markets yesterday closed one of the worst months since the start of the Covid-19 pandemic two years ago. So far this year, the falls are around 8%. Russia’s invasion of Ukraine was the last straw for stock markets which were already in shock. With inflation soaring and central banks forced to move to keep economies from overheating, many stocks had already begun to suffer in January, or even earlier.
The most widely used global stock market index, the MSCI ACWI, summarizes the evolution of 2,900 companies from all over the planet, including companies from 23 developed countries and 25 from emerging countries. During the month of February, this index recorded a correction of 2.6%, which is added to the 4.96% of January. This is the worst streak since the coronavirus crisis broke out and severe restrictions on mobility began to be imposed around the world.
Europe’s Stoxx 600 index fell 4.6% in February, its second-worst month since October 2020, when the second wave of the coronavirus raged.
Although the theater of war operations is still limited to Ukraine and Belarus, the effects that the conflict will have on the whole world are already beginning to be felt. The first, the most obvious, is the rise in the price of oil, gas and other raw materials.
In addition, the closure of European airspace to Russian planes, the sanctions against its oligarchs or the freezing of its central bank assets will also end up causing various distortions in the markets.
The European index that fell the most during the month was the German Dax, which fell 7.7%, in its worst month since October 2020. Some of the companies that suffered the most during the month were the insurer Allianz or the chemical producer Basf.
In the case of the Spanish stock market, the Ibex 35 (-1.55% over the month) did a little better than the others because the banking sector has a significant weight and the prospects for higher interest rates have benefited to big banks. Although it remains to be seen to what extent these expectations for monetary policy change now that the war has broken out.
Only one major European stock market is positive so far this year. It’s the British. There, mining companies such as Glencore, Riotinto or Anglo American are profiting from the rise in commodity prices. BAE System, the second largest military contractor in the world, also raised its price by 30%.
US stock markets are also correcting sharply. The S&P 500 index accumulates a drop of 9% and the Nasdaq, 13%. In his case, the large weight of technology companies in the indices in January contributed to accelerating the collapse.
The key is knowing how to value these companies. Many of them had very optimistic revenue generation forecasts. When these future flows were reduced to their present value, with rates at 0%, the current valuation was more attractive. Today, with long-term rates and great geopolitical uncertainty, it is much more difficult to put a price on these possible future cash inflows.
The big dilemma now is what the big central banks will do. “We see that inflation is going to continue to be very high, which is why we think it will be difficult for the US Federal Reserve or the ECB to change their plans to cut rates and withdraw stimulus much.” , explains Stefan Hofrichter, Director of Economics and Strategy. of Allianz Global Investors.
Although the falls have been severe over the past two months, experts point out that most indices hit record highs in November and last year revalued by almost 20%.