(BFM Bourse) – For many weeks now, no catalyst has appeared capable of stopping the downward trend of the indices (even if the European markets are outperforming Wall Street for once). Initially affecting some stratospheric valuations, the purge spread to reasonably valued companies which certainly offer entry points for the long term. But as long as inflation remains a threat it is difficult to see the light at the end of the tunnel for the indices.
In the eyes of Philippe de Gouville, CEO and co-founder of Ismo – an offshoot of the management company Wide Asset Management aimed at facilitating daily savings, in particular by investing rounds to the higher euro when spending with your bank card – it is the “historic error” made by central bankers in 2021 that largely explains the market downturn in recent months. The latter were indeed mistaken about the nature of the inflation which was already being felt in the main economies and in particular in the United States. In fact, the disruptions that we thought were temporary (the famous “transitional” pressures) in the supply chains quickly spread to all economic agents, including via wages.
So while central banks could have started deflating the liquidity bubble and raising rates several months ago, they missed the opportunity. Now that the genie has come out of the lamp, they are struggling to regain credibility in the eyes of investors – evidenced by the steady rise in long-term inflation expectations, which reflects the loss of confidence in the ability central banks to fight it, continues Philippe de Gouville.
Especially since the increase in key rates is a tool that acts more on demand, which is effective in curbing the ability of banks to offer credit in the event of economic overheating. However, it is a supply shock on raw materials that is currently fueling the rise in prices due to Chinese difficulties in the face of the pandemic, depriving a large number of factories of components around the world, and the conflict in Ukraine. However, the Fed and the ECB cannot print oil or wheat or electronic components… Investors therefore believe that it will be extremely difficult to bring down current inflation by reducing excess liquidity while growth shows in parallel signs of slowing down. “If we continue the current trends between the clear and assertive intention to catch up to kill inflation and the rate at which the economy is slowing down, the hypothesis of a recession is credible,” adds the specialist.
In this context, it was growth stocks, which are much more sensitive to interest rates, that suffered particularly. It is true that the segment clearly harbored excessive euphoria, granting delirious multiples and very optimistic forecasts to unprofitable technology companies, abounds Benjamin Sacchet, associate director and wealth manager at Avant-Garde Investment. “The first leg of market decline allowed a correction in line with what we expected, while allowing large profitable growth companies such as GAFAM to resist”, he underlines. But now, “seller flows, which are largely passive flows due to the weight of ETFs, are dragging the entire market down, including GAFAM”, resulting in sometimes spectacular corrections on key companies whose ability to creation of value no longer needs to be demonstrated.
“At Avant-Garde Investment, we consider that this opens an interesting window with a lot of long-term opportunities. It is always very difficult to go against an unfavorable market momentum, and it is not because the valuations of securities like Alphabet or Apple are so affordable that they cannot go lower! We do not pretend to determine the timing of the low point. But by gradually repositioning ourselves on American stocks and in particular GAFAM, we are giving ourselves the means to create long-term performance,” says the manager.
For example “by buying Alphabet today at an enterprise value on operating surplus of 11 times, given the foreseeable growth of the results of Google’s parent company, the value of the investment would be almost unchanged over the five next few years even if this multiple was still halved by then”. The investment thus appears largely protected even in the face of a very pessimistic hypothesis.
After having been showered with liquidity by the central banks, “the withdrawal period is necessarily painful for the markets”, sums up Benjamin Sacchet. “Central banks’ objective today is to reduce inflation, not to support growth. This phase could last 12, 24 months or more, no one can say. But once inflation is contained, we have to s “Expect a change in tone and a rebalancing of monetary policy in favor of growth. At that time, multiples should pick up in a market that has become much healthier again under the effect of the purge,” he observes.
“Clearly the central banks intend to tighten rates until inflation gives way, considering that the strength of the job market allows them to do so”, anticipates Philippe de Gouville. “However, the beginning of an inflection may be looming, with some investors considering that the bullish expectations have gone too far and that at some point central banks will ease off if the risk of recession arises. more pressing”. Once the peak of inflation has passed, even thanks to a simple base effect, concerns could begin to subside “but for that to happen, commodities would have to start falling, but that is not yet the case”.
In the meantime, from the point of view of a retail investor, there is no magic recipe for protecting against inflation. Betting on indexed products can be interesting, but does not completely protect against the increase in real rates, that is to say the nominal rates of investments corrected for inflation. Another option is to introduce a certain dose of sector bets (on energy or basic products) taking care, however, not to distort a portfolio that has so far been well diversified, underlines Philippe de Gouville.
Guillaume Bayre – ©2022 BFM Bourse