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Weekly report on the Markets

Recent weeks have seen a relatively strong trend in the markets, which could eventually lead to a stabilization. The reason for which lies in the fact that fears of a slowdown in economic growth can cause falling inflation. This situation could actually encourage Central Banks to take a less aggressive stance because they prioritize keeping inflation low while being attentive to a possible slowdown in growth.

Although markets are positively affected by these fears, the current situation is being characterized by an economic slowdown which is good for stock markets, which, in normal times, is obviously not considered a plus.

As for the major risks playing out on the world stage today, it is thought markets are greatly underestimating the conflict in Ukraine. At the moment, only the main effects of this war are being considered, such as an increase in inflation. There could, however, be sudden and negative changes if the conflict escalates.
The next two or three months will be decisive in trying to figure out the course the war will take or what the medium- to long-term trends will be.

As far as economic growth is concerned, it is believed that there could be a slowdown and perhaps even a recession. However, at the moment some company valuations are so good – especially great is the strength of inflation within the balance sheets – that it is still thought that there are opportunities to select certain stocks and invest because the prices very attractive. If the economy slows down, the effect of inflation will be bigger than any recessionary effect in terms of both revenues and profits, and margins for companies.
We are starting to see the positive influence of inflation on companies’ balance sheets.

On the one hand, inflation tends to increase companies’ revenues and profits, and this effect has the potential to be positive in terms of prices and market valuations, as share prices tend to rise and market caps rise accordingly. On the other hand, the effect of inflation is negative because it can damage economic growth, but it is believed that at this stage even in the event of a recession the strength of inflation is so great that a medium- or short-lived recession can be bypassed very well.

It is thought that current prices are very attractive, some companies trade on really low multiples, and above all there is a driving force that, as time passes, becomes stronger and stronger. This creates a compounding effect, so being frightened by a possible recession is useless given the fact that the boost inflation gives multinationals, especially in the sectors that are quickest to pass on price increases to consumers, is very big. A strong improvement in balance sheets has been seen in sectors like food and beverage, pharmaceuticals and consumer staples even if prices on average should go up.