Traders work on the floor of the New York Stock Exchange (NYSE) in New York, United States, January 10, 2022. REUTERS / Brendan McDermid

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LONDON, Jan. 12 (Reuters) – The sudden rise in inflation-adjusted bond yields this month rocked TINA, the thesis that “there is no alternative” to equities, but if history is a guide, stocks should resist this rise in real interest rates or even flourish.

With 10-year inflation-adjusted U.S. bond yields below minus 1%, many investors view stocks as the only dominant asset capable of generating strong returns.

TINA is believed to be the engine behind nearly $ 1 trillion in inflows to global equity funds last year, a figure that BofA data shows topped the combined inflows of the previous two decades.

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However, with US inflation peaking at around 7% and the Federal Reserve likely to hike interest rates 3-4 times this year, real yields – the nominal interest rate paid by a bond minus the rate d inflation – are on the rise.

Stocks fell after a spike in US yields. The impact has been particularly severe on the technology-intensive Nasdaq 100 Index (.NDX), where stocks trade on the premise of future bumper earnings growth, making them particularly vulnerable to yield rates. higher interest.

The Nasdaq is expected to experience its second worst start to the year since the 2008 crisis, coinciding with a 40 basis point jump in ten-year inflation-adjusted yields since December 30.

But banks, including JPMorgan and Goldman Sachs, are still advising clients to buy the downside, arguing that real yields remain deeply negative around -0.8%, that higher interest rates are already being factored in and that corporate earnings are strong.

Importantly, stocks have performed well in many previous bouts of rising real returns, provided economic growth holds. Bernstein notes, for example, that during the last five rounds of real rate “normalization” in 1975, 1980, 2012-2013, 2016 and 2020-2021, global stocks have returned between 2.3% and 51, 8%.

“Historically, when real returns have gone back to zero from negative levels, stocks have had positive returns,” Bernstein strategists Sarah McCarthy and Mark Diver told clients.

Separately, data from Truist Advisory Services shows that the S&P 500 (.SPX) has posted positive returns in 11 of 12 real rate hike cycles since the 1950s.

Additionally, real yields are expected to rise at a more gradual rate and will not hurt markets or economic activity until they actually turn positive, JPMorgan said, forecasting year-end levels around -0.25%.

In the meantime, the trend should prompt further sector shifts – higher real returns tend to be bad news for tech stocks, but financials, commodities, and cyclical stocks such as travel in China. generally benefit, JPMorgan wrote.

American Inflation Notes


Behind the massive tech sell-off lies a premise that higher interest rates will lower stock valuations. Typically, a sustained 100bp rise in US TIPS yield results in a 20% drop in the price / earnings multiple, said Luca Paolini, chief strategist at Pictet.

Ultra-low rates have boosted equity valuations globally, but those of tech stocks, often viewed as ‘long-lived’ assets negatively correlated with rising bond yields, have exploded to what some consider like bubble territory.

Investing in technology companies, some of which generate little or no profit, is therefore a bet on their potential for future earnings. When rates rise, the present value of the investment decreases on the fund managers’ spreadsheets.

The Nasdaq 100 is currently trading at 27.8 times its 12-month futures earnings – a 54% premium over the MSCI All Country World Index (.dMIWD00000PUS), according to Refinitiv Datastream, and nearly double the average. over 10 years.

Grace Peters, head of EMEA investment strategy at JPMorgan Private Bank, expects the S&P 500 – also highly technological and currently trading at 21.1x forward earnings – to end the year with a ratio Average P / E lower by one percentage point.

“With expectations of rising real returns, we can expect stock valuations to fall. The multiple cuts will be particularly severe for the types of stocks that are seen as “tomorrow’s jam,” she said, referring to companies negotiating future earnings expectations.

Tangible profits and cash flow rather than future growth would command higher premiums as the Fed’s rate take-off approached, she added.



The other unknown is how retail investors, a major new force in equity trading, will fare as returns rise and technology becomes volatile.

Having gotten into the habit of buying into stock market lows thinking the monetary stimulus would dampen massive selling, retailers might find such strategies less rewarding as the Fed sets the stage for its first rate hike in three years .

Giuseppe Sersale, fund manager and strategist at Anthilia expects equity markets to gradually lose momentum – “rebounds will become more disrupted and lows more aggressive.”

“The retail industry is currently suffering from fatigue and no longer has the firepower it once had,” he added.

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Reporting by Danilo Masoni, Sujata Rao, Julien Ponthus, Saikat Chatterjee and Yoruk Bahceli; Editing by Kirsten Donovan

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