The markets are going through hard times. And the worst could be yet to come. Investors remain wary of the actions of the central bank. “We are stuck between a rock and a hard place,” said Kevin Tozet, a member of the investment committee at asset management firm Carmignac. “Inflation needs to be brought under control in order for the stock and bond markets to gain some stability. At the same time, inflation will be controlled by tightening financial conditions, which does not bode well for financial markets,” he explains.
Raising interest rates by central banks can trigger an economic downturn. As recognized by the chairman of the US Federal Reserve System (FRS) Jerome Powell on June 22 at a hearing in Congress. The war in Ukraine only exacerbated the surge in prices in recent months, especially for raw materials. And share prices generally fell in the stock market. Thus, the CAC 40, the flagship index of the Paris market, has lost more than 15% since the beginning of January. And even more noticeable is the fall of the S&P 500 index (-18%), which unites the 500 largest American companies, beyond the Atlantic.
Stock market: stocks and sectors in the long run
In this context, it is important to tailor your portfolio of financial securities to minimize the risk of loss, reduce exposure to high price volatility, and possibly hope for capital gains.
Health care is among the priority sectors. Pharmaceutical stocks are generally considered defensive stocks, i.e. their financial performance depends little on the development of the economic situation. Obviously, households will cut other less important expenses before they stop treating themselves.
In addition, the pharmaceutical sector suffers slightly less margin pressure than other so-called “defensive” values such as agri-food and mass distribution. Among these companies we find, for example, the French Sanofi, the American Pfizer, the Danish Novo Nordisk or the Swiss Roche and Novartis.
Health insurance companies in the United States “should also do well,” notes Kevin Tozet. We can bring here, for example, Anthem, Cigna and Humana.
Main consumption groups
Other defensive actions are basic consumption companies that sell essential goods and services such as agri-food groups (Nestlé, Danone, etc.). Or even big distribution companies like Carrefour in France. These companies could still be hurt by inflation and falling demand unless wages are seriously revised upwards.
“In times of inflation, we buy more of what we need than what we want,” says Kevin Tozet. Thus, a period also characterized by an economic downturn is not conducive to so-called “cyclical” stocks, such as car manufacturers, whose activities are more sensitive to the economic situation.
Conversely, a company like Colgate-Palmolive, which specializes in hygiene and cleaning products, seems more cheerful. Because, recession or not, you will continue to brush your teeth, bathe, and clean your house.
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A bit of luxury and technology
Although they are not considered defensive stocks, there are some “quality” stocks that are worth adding to your portfolio. This applies to luxury companies such as Hermès or LVMH. “These companies can maintain their margins because the wealthiest consumers are less sensitive to price increases,” says Kevin Tozet. In addition, China, an important luxury market, is reopening its economy, emerging from the very strict restrictions of major cities such as Shanghai.
While big tech stocks have been hit hard by the fall in prices and are sensitive to economic cycles, they also remain attractive. “It is in the tech sector that we continue to find the companies with the strongest growth,” Werner Wuyts, a fund manager at private bank Dierickx Leys, told L’Echo newspaper. On the other hand, we need to be more selective than before and prioritize profitable companies like Microsoft and Alphabet.
There are also cybersecurity groups in the tech industry, like California’s Palo Alto Networks or France’s Wallix, which stand a good chance of doing well in the stock market in the long run. Because computer attacks are multiplying, the victims of which are companies and state administrations. And the war between Russia and Ukraine only exacerbated this phenomenon.
Another promising sector in the long term is renewable energy and, more generally, energy transition companies such as US-based TopBuild, which specializes in building insulation. In France, various companies far from the tenor CAC 40 are promising: Lhyfe, recently listed on the stock exchange, and McPhy, both specializing in hydrogen; Albioma, solar photovoltaic and biomass expert; or Neoen, which specializes in solar and wind farms. “Solar energy is much more competitive than it used to be, and the cost of producing it has come down,” said Frédéric Rollin, investment strategy consultant at Pictet AM.
The war in Ukraine also reminded us of the huge problem of energy independence for France and Europe. Therefore, investors may also turn to big companies in the sector, such as Denmark’s Orsted or even TotalEnergies, which are investing more and more in renewable energy, although the French oil company remains one of the world’s fossil fuel heavyweights.
Euro: ECB policy will be critical to maintain it against the dollar
Bonds of some developing countries
In addition to stocks, you can bet on certain debt securities issued by emerging markets. For example, the Carmignac Patrimoine fund holds 3% in its portfolio. “We give preference to countries that have significant raw material resources. In addition to Brazil and Mexico and their oil reserves, some territories contain materials related to the energy transition, such as Chile, the world’s leading copper producer,” says Kevin Tozet. However, raw materials continue to benefit from high prices.
In addition, after the Covid-19 crisis and then the war in Ukraine, supply chains were damaged. “We are seeing a convergence of production, which makes Eastern European sovereigns like Romania attractive,” explains Kevin Tozet.
Some Chinese shares
Port congestion in China and the country’s stringent lockdowns have had a particularly negative impact on the increasingly globalized economy. Now Beijing is easing the noose and appears to be moving towards more favorable rules for the tech sector and real estate. Moreover, fiscal stimulus should support the country’s economy.
That’s why Carmignac sees fit to gain access to Chinese stocks like Nasdaq-listed e-commerce company JD.com, companies linked to the energy transition like Sungrow or clothing brand Anta Sports, while Beijing wants to encourage its population to more physical activity.
Don’t forget the gold
In times of crisis, gold remains largely a safe haven, separated from the financial markets. Thus, the yellow metal is a good way to diversify your portfolio. If the price of an ounce of gold has fallen from its peak in March 2022, after the Russian invasion of Ukraine, the asset traditionally holds up well against a crisis and loss of confidence.
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