World stock markets yesterday closed one of the worst months since the Covid-19 pandemic began two years ago. So far this year, the falls are around 8%. Russia’s invasion of Ukraine has been the last straw for stock markets that had already been reeling. With inflation skyrocketing and central banks forced to move to prevent economies from overheating, many stocks had already started to suffer in January, even earlier.
The most widely used world stock market index, the MSCI ACWI, synthesizes the evolution of 2,900 companies from all over the planet, including firms from 23 developed countries and 25 from emerging countries. During February this index has registered a correction of 2.6%, which adds to the 4.96% of January. It is the worst streak since the coronavirus crisis broke out and strong restrictions on mobility began to be imposed around the world.
The European Stoxx 600 index fell 4.6% in February, its second worst month since October 2020, when the second wave of the coronavirus was raging.
Although the theater of war operations is still restricted to Ukraine and Belarus, the effects that the conflict is going to have on the whole world are already beginning to be evident. 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 the assets of its central bank will also end up causing various distortions in the markets.
The European index that has fallen the most in the month has been the German Dax, which has dropped 7.7%, in its worst month since October 2020. Some of the companies that have fared the worst in the month are the insurer Allianz or the producer of chemical products Basf.
In the case of the Spanish stock market, the Ibex 35 (-1.55% in the month) has done somewhat better than others because the banking sector has significant weight and the prospects of rising interest rates have benefited the large banks. Although it remains to be seen how much those expectations about monetary policy change now that the war has broken out.
Only one large European stock market is positive so far this year. This is the British. There, mining companies such as Glencore, Riotinto or Anglo American are benefiting from the rise in raw material prices. BAE System, the second largest military contractor in the world, has also shot up its price by 30%.
The US stock markets are also correcting strongly. The S&P 500 index accumulates a drop of 9% and the Nasdaq, 13%. In his case, the great weight that technology companies have in the indices contributed in January to accelerating the collapse.
The key is how to value these companies. Many of them had very optimistic revenue generation forecasts. When those future flows were brought to present value, with rates at 0%, the current valuation was more attractive. Now, with long-term rates and great geopolitical uncertainty, it is much more difficult to put a price on those possible future inflows of money.
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 believe it will be difficult for the US Federal Reserve or the ECB to change their plans for rate cuts and stimulus withdrawals much,” explains Stefan Hofrichter, director of economics and strategy. of Allianz Global Investors.
Although the falls have been severe in the last two months, experts recall that most indices were at record highs in November and that last year they revalued almost 20%.