Blog: You, us, everyone

While the conflict in Ukraine is unfolding, equity markets have been quite resilient in recent weeks. It looks like as if markets have anticipated much of the negative news flow prior the start of the crisis. 

Yet, spring has not yet come, and there are a number of concerns that makes us believe that summer is to come late too! The US earnings cycle has started with a few prominent victims, such as Netflix (loss of net subscriptions). The overall outlook is somehow uneven. US earnings are unlikely to rise very much as input prices, and overall staff costs have increased. The US market is everybody’s darling, but the average multiples are high and the FED has started taking specific steps to combat inflation. A higher average cost of capital could bring to an end the long-lasting and general outperformance versus other markets. 

While some specific market segments, such as real estate and pharma, continue to look attractive, the remaining industry sectors are being much less attractive in the short-term.  

Why are we still favorable towards the real-estate and pharma sectors? Even with interest rates on the rise, there is a substantial undersupply in new housing units. Secondly, the demand for new individual housing is not going to break away so quickly as Generation Z is entering into the lease market thereby accelerating the move of the Millennial Generation into independent housing. At the same time, most of the baby boomers are in or close to retirement. All these age classes ask for specific housing which is supportive for the market.

What about pharma? While pharma is in general big value, we consider biotechnology, MedTech, and telemedicine as attractive long-term growth opportunities. In fact, these sub-sector segments are today where the IT sector was about 1990. Opportunities to modernize the medical sector are unaccountable. On average, industry-wide accidents are relatively rare, but when they do occur, they offer, under normal circumstances, good investment opportunities for investors.

Elsewhere, spring will arrive even later. Europe is exposed to a lingering conflict on its east side. This in turn is negative for consumer confidence and economic growth. Ultimately, earnings growth will be impacted.  Asian markets offer good value but hold, by definition, a higher level of risk compared to other markets, and they are less covered by research. In the short-term, markets continue to be impacted by a possible slowdown of economic growth in China, but earnings multiples are reasonably low enough to become highly attractive. Asian markets remain relatively attractive since Central Banks have more leeway to implement an easing monetary policy which will stimulate economic growth and thereby better equity markets. 

On the fixed income side, we see some constructive opportunities after the steep sell-off which lasted from December last year to March 2022. As of now, bonds and credit in development markets look oversold compared to the historical trend. However, the High Yield segment appears to be mispriced—under standard conditions, the market tends to move in synch with equity market volatility. Today, however, its level is lower than the implied VIX Index. 

Currencies: Given Europe’s proximity to Russian and now the conflict in Ukraine, the risks to the economy, and so to the currency, are skewed to the downside. The risks are also skewed to the downside for the UK, but not for the same reasons. Britain’s trade deficit increased to a new record level in January, and there is no change insight—the long-term impact to the currency valuation is going to be negative.