With inflation continuing to erode returns on some investments – shifting part of your portfolio to equities, one of the best performing asset classes over the long term, can be a tempting move.
The stock markets, which have corrected well since the start of the year (-12% for the CAC 40), are much more affordable than last year, but in a volatile context, and at a time when many values continue to drink the cup – is it really a good time to buy stocks?
We put the question to Frédéric Rollin, investment strategy advisor at Pictet Asset Management.
What are the reasons that explain the current nervousness of the markets and these corrections, sometimes violent from one session to another?
It is the concomitance of three bad news: the Russian-Ukrainian conflict, inflation and the reaction of the American central bank, as well as the health situation in China.
First of all, the conflict in Ukraine – which could still get bogged down – has of course weighed on market confidence, but it should remain contained and limited to Ukrainian territory. And despite this situation, energy prices have significant downside potential. Prices have already risen sharply and global growth is slowing. The negative scenario – there is always one – would be for Moscow to suddenly stop its oil and gas exports, but that remains unlikely.
The second reason why the markets fell is related to inflation. The Fed made an error of judgment in considering that the rise in prices would be temporary. Result: at a time when US growth is slowing, it finds itself tightening its monetary policy. This is what caused the recent fall in US bond indices.
Today, however, the markets’ reference rate, that of 10-year US government bonds, is quite affordable: we have the feeling that we are nearing the end of the decline. With the economic slowdown, inflation should also slow down and push the markets up again. You still have to be a little patient.
Finally, the third source of concern relates to the situation in China. Its “zero Covid” policy of strict confinements drastically reduced the activity of the country, which remains the 2nd economic power in the world. And, for the time being, the central bank and the Chinese government have not provided a major monetary and fiscal response as they did in 2020. Beijing will eventually react, but the current situation continues to create volatility in financial markets.
Galloping inflation may encourage some savers to take more risk, for example by turning to the stock markets, whose indices have corrected sharply since the start of the year. For these investor profiles, with a low appetite for risk, is it now worth taking the plunge?
European markets are indeed starting to reach interesting levels, with rather low valuations. The economic outlook has certainly been revised downwards, but the growth projections remain, which leads us to believe that we have not entered a lasting downward cycle.
Under these conditions, yes, the moment may seem opportune to launch out and invest in European equities for the long term. However, we recommend to wait a little longer, as the levels could drop further in the days or weeks to come.
In terms of asset allocation, why is your current preference for European markets?
European equities are the most attractive, because their valuations are much lower than those of American equities, they are rather cheap compared to bonds, and the inflationary risk is also lower in Europe than in the United States. United.
Which sectors of activity seem to you today interesting to invest with a certain prudence?
Our caution will manifest itself in a preference for defensive sectors, which are not very sensitive to economic cycles, such as healthcare.
With regard to the question of the choice between growth and value stocks, with the end of the rise in long rates, we recommend returning to certain well-chosen growth sectors, such as those which have emerged strengthened from the Russian- current Ukrainian.
We identify two of them: renewable energies, because they are simultaneously driven by productivity gains, the climate emergency as well as the imperative of energy independence which has emerged with the Russian conflict. And the security sector, in particular computer security, while we still realize a little more that cyberspace is a potential place of war in this context of geopolitical instability.
Other growth stocks which have corrected well since the beginning of the year, such as the luxury sector, still seem interesting to us. Although they have been sanctioned for their high exposure to China, we believe that they still have significant growth potential.