Although stock markets reacted downwards with some intensity (losses of between 10% and 15%) at the start of the war in Ukraine, the duration of the corrective process was relatively short: two weeks. But the recovery process has been almost as fast. The strength shown by the stock markets in March is surprising, especially if we take into account the uncertain environment that we still face. It is true that the most extreme scenarios – world conflict – seem to have been avoided and, although China has not mediated for the end of the war, it has shown a position that is, at least, neutral. And it is no less true that the markets were already accumulating losses in the previous weeks. These, by the way, cannot be attributed —or only in a reduced percentage— to the fact that the market discounted the war.
We want to take the opportunity to insist that the invasion scenario was not included in the prices just a few hours before it began. The transfers of the Stock Exchanges in the previous days were more linked to the rise in interest rates derived from the change of message from the central banks. But here too we find an interesting element of analysis of the recent recovery in share prices: they have had to absorb a significant rise in long-term interest rates (the US and German 10-year benchmarks have been at 2.45% and 0.55%, respectively). The denominator of any equity valuation model has increased significantly (of the order of 100 basis points), with the consequent impact on prices. And, as if that were not enough, GDP growth forecasts have been cut by between 0.5% and 2.0% for most of the world’s economies.
What then explains the favorable balance of the last six weeks in the markets? The outlook for corporate profits, which, in contrast to what is happening for GDP, has been revised upwards, especially in Europe (in 2022 they would grow to 12%). There are two keys that explain this fact. The first is that profits, unlike GDP, are measured in current terms, that is, they take inflation into account. And although not all companies are going to be able to maintain their margins, it is obvious that part of a CPI growth of between 5% and 10% is transferred to their profit figure. The second, that sectors such as energy and natural resources, whose weighting in stock indices (between 10% and 15%) is clearly higher than that of GDP (5%) are going to experience growth in earnings per share of the order of 40 % this year.
David Cano and Alvaro Lopez Vivas are professors at AFI School of Finance
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