9 MAR, 2023
“Higher dispersion in valuations leads to potential stock opportunities, in particular, in the value space”, is one of the conclusions of the analysis prepared by Kasper Elmgreen Head of Equities, Yerlan Syzdykov Global Head of Emerging Markets, and Kenneth J. Taubes CIO of US Investment Management from Amundi.
Markets have been rallying on the back of a receding energy crisis, China reopening, and a semblance of peaking central bank hawkishness, even as earnings season has been subdued so far. In the US, consensus expectations for 2023 operating earnings and profit margins look implausible, given concerns on consumption and the deceleration in growth. In Europe, an expected slowdown in earnings is confirmed, despite some near-term improvement in the economy. Thus, instead of rooting for markets, investors should explore businesses that can sustain margins and reward shareholders, but offer attractive valuations. We believe such businesses can be identified by strong bottom-up analysis and by combining quality and value investing in developed and emerging markets.
Based on a balanced style, we explore quality cyclical businesses and defensive stocks, such as consumer staples and pharmaceutical companies. However, given the current environment in which prices in some cyclical sectors have run ahead of their fundamentals, we think investors should consider moving out of them to defensive segments with better risk/reward profiles. In particular, we trimmed our favourable view on financials (still positive though) a little and upgraded pharmaceuticals. Nonetheless, we remain constructive on retail banks, owing to the beneficial effects of high interest rates on their net interest margins. We also like industrial companies that are facilitating the energy transition. With regard to staples, we maintain a constructive stance, selecting names with strong pricing power and robust balance sheets that can provide a shield in times of rising rates. Conversely, we are cautious on utility companies and the technology sector.
This year’s rally is more a case of multiples expansion, making us cautious overall as valuations are expensive in some cases. Accordingly, we think investors should avoid risky, high beta names that are now excessively dependent on an unpredictable economic cycle. In contrast, we prefer businesses committed to returning cash to shareholders: for example, among defensives. Here, we focus on names that show reasonable valuations even if this means going beyond traditional defensives. Two such examples are health care equipment & services and life science tools sectors. But we see very little value in staples, utilities and real estate. At the other end, in cyclicals, our highest conviction sectors are energy and banks. We also like capital goods & materials among cyclicals, but prefer idiosyncratic stories that should be able to outgrow the cycle. However, the rebound witnessed in cyclicals since last October has made consumer discretionary and industrial names more exposed to the risk of an economic contraction.
We maintain a cautiously optimistic outlook on the back of China reopening, reasonably attractive valuations, and earnings dynamics. However, investors should stay selective and focus on fundamentals. Our main convictions are China and Brazil, but regarding the latter, we are less positive than before owing to political volatility. We see some valuation concerns in India, but the long-term story looks intact. From a sector perspective, we are positive on discretionary and real estate, and remain cautious on health care.