(BFM Bourse) – Somewhat neglected by managers for years in the face of the spectacular growth of the technology compartment, particularly on the other side of the Atlantic, diversification, both sectoral and geographical, could make a comeback.
Outdated, diversification? Not so fast. While the Nasdaq 100 has outrageously dominated the markets in terms of performance for the past 10 years, this has not been the case for several months and fears surrounding the Fed’s monetary policy now point to a more complicated year in 2022 than the previous ones. for growth stocks, especially technology stocks. “A rebalancing is certainly emerging on the equity market,” observes John Plassard, Deputy Director of Investments at Mirabaud.
For neophytes, a step back is necessary. “Twenty years ago, remembers the expert, to avoid having too much volatility in your equity portfolio and achieve a convincing performance, you “enough” to have a good diversification between the 11 sub-sectors of the S&P 500″. “However, since the end of the 2008 crisis, if you had only invested in the American technology sector, you would have largely beaten all the existing benchmarks,” he recalls. For example, the Nasdaq 100 has risen more than 700% over the past ten years, compared to around 110% for our CAC 40. John Plassard.
Over the past six months, small caps, yield stocks, mid caps, emerging markets, developed foreign stocks and even commodities have all outperformed the hitherto untouchable Nasdaq 100. “Even the old pariahs like energy and finance have done better than the technological compartment” notes the expert. So is diversification making a comeback?
100 S&P 500 companies down 20% from their highs
If it is still “difficult to draw any conclusion at this stage, the false starts” being legion at the beginning of the year, the premises of a change are more and more obvious” judge John Plassard.
The decline in the main US indices certainly appears contained compared to their recent peaks (-6.5% for the S&P, -11.8% for the Nasdaq at the close of Thursday) but certain signals are not misleading. The ARKK US fund, led by Cathie Wood and which specifically targets the most innovative companies, has lost more than 50% since its peak. Perfect examples of the frenzy that has taken hold of investors vis-à-vis some of these values, Robinhood and Peloton are each dropping more than 80% from their respective highs.
“In fact, there are over 100 S&P 500 companies today that are down 20% or more from their highs and if most experts tell you it’s backed by all the GAFAMs that represent nearly a quarter of the weighting of the S&P 500, this does not seem to be the case in practice since the latter have underperformed the index since the beginning of the year” points out John Plassard. This is explained in particular by the fact that cyclical stocks have taken over in a monetary environment which tends to normalize, and the valuations of the technology sector with it.
There are many ways to diversify, but John Plassard avoids the bond markets and other asset classes here to focus on the possibilities within the equity markets.
Undervalued banking stocks
According to him, several sectors can continue to outperform their benchmark index, starting with banking stocks. While the big names in the sector are already recording convincing rebounds since the crash of March 2020, the investment specialist points out that the compartment still displays “obvious undervaluation compared to other sectors”. According to data from Factset, banking stocks are trading with a price-earnings ratio of 8.4x against MSCI Europe, “making the sector one of the most undervalued in Europe behind the unloved energy (6.6x)”. John Plassard also points out that most of the profitability of banking establishments comes from net interest margins, and that they thus remain very sensitive to changes in interbank rates, themselves correlated in particular to changes in the Bund German. “The recent rise in sovereign rates, which should continue, should obviously fuel the theme,” he believes. The banks have also overcome the crisis without too much difficulty, and retain an obvious attraction with their substantial dividends, adds the expert.
“Given the challenges, both cyclical (stagnation or even fall in long-term interest rates, sustainable recovery in economic growth) and structural (emergence of new modes of consumption of banking services, regulatory pressure, etc.), it is however unlikely that the we are returning to levels that we knew in the “golden age of banks”” he nuances.
The energy sector is also one of the “lagging behind” sectors according to the expert, who considers that oil stocks should benefit “from the rise in the price of a barrel of oil, the evolution of ESG profiles (environmental criteria, social and governance, editor’s note) of companies (especially European), the return of dividends, an undervaluation and a continuation of a short squeeze”.
Luxury and semiconductors
Other compartments, if they have not been neglected as much as the first two mentioned, retain significant potential. Some growth sectors are not “dead”, says the expert, who cites the luxury sector in particular and points to the solid quarterly results unveiled by Burberry or Richemont this week. The values of the sector also still have many growth drivers with China, online sales or even “millennials and “generation Z”.
A sub-sector of the large technology compartment is also finding favor in the eyes of the expert: that of semiconductors, the shortage of which is expected to continue in 2022 due to trade tensions between the United States and China, the continued deployment of electric vehicles, the smartphone replacement cycle or the increased demand for cryptocurrencies. On the other hand, the offer is struggling to meet this exponential increase in demand, and the champions of electronic chips, well established in view of the very high cost of entry for potential suitors, should benefit from it.
Towards a Europe that outperforms?
In geographical terms, the expert favors Europe, which could finally have finished eating its black bread. “In any case, this is the question that we ask ourselves at the start of the year after more than 15 years of outperformance of the American indices”. If he suggests investing in the Old Continent, it is primarily because, “even if some consider this a monetary policy error, the ECB is still lagging behind the Fed in terms of monetary normalization”. “Rates should not actually go up before 2023 in Europe when they should be raised at least 3 times across the Atlantic” he argues.
To this we can add that the deployment of the pan-European fiscal stimulus plan will be launched this year and “should energize the cyclical companies of the bloc”, while the valuation differential with the United States “can also be an argument in favor of a European outperformance” of the Old Continent. “According to Bloomberg data, price-earnings multiples in the region are around 20% lower than pre-pandemic highs, while those in the United States are around 10% higher,” said John Plassard.
Finally, Europe enjoys a much more “value-cyclical” profit than the United States, and it is enough to take a look at the composition of the MSCI Europe (432 stocks) and the S&P 500 to be convinced of this. While the technology compartment weighs 8.5% of the broader European index at the end of December, it represents more than 28% of the capitalization of its New York counterpart – even though Amazon is classified in the “discretionary consumption” category.
Quentin Soubranne – ©2022 BFM Bourse