The equity map as the crisis unfolds The equity map as the crisis unfolds The equity map as the crisis unfolds

The equity map as the crisis unfolds

Equities 8 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Volatility is on the rise today with European banks headed lower as interbank funding stress remains elevated. There is a risk that this could snowball into a wider crisis and thus investors should think about their exposure across industry groups, segments, and themes. We map out which pockets of the equity market provide relative safety for investors and what should segments of the equity market should be reduced.


Defence, semiconductors, and mega caps are holding up

It has been a dramatic week as we have highlighted in our recent equity notes with the risk that these events will snowball into a crisis moment for the financial and monetary system. Yesterday, the rebound flows came in hunting for quick gains following a dramatic Monday trading session across all asset classes, but today things are reversing fast with the FRA-OIS 3-month spread (interbank funding spread) increasing to ~65 basis points which is the highest since the low point during the early days of the pandemic. European banks are offered heavily in European trading with the leading European banking index down 6.8% and EURJPY (a proxy for risk-off flows) down 3% which is a big move. Investors should be prepared for further increases in volatility across not only equities but all asset classes. In today’s equity update we aim to map out where flows are headed across different segments of the equity market.

STOXX 600 Banks Index

European banks | Source: Saxo

Across our theme baskets investors are still bidding up the values of themes such as semiconductors, and defence. Mega caps are also holding up relatively well as the biggest companies in the world are seen as a relative safe haven. Themes reflecting discretionary consumption such as travel and e-commerce are under pressure, and high duration stocks such as our bubble stocks basket is the worst performer the past week down 7%. For the long-term investor our main view on themes is still that the physical world will outperform the digital world as a function of high structural inflation, higher interest rates, fragmentation of global supply chains, green transformation, and the war in Ukraine.

What should investors consider?

As we wrote yesterday small caps are always a bigger risk when financial conditions are tightening so investors should consider reducing exposure to small caps. Financials should naturally also be reduced as the unknown risks at this point are high. Quality companies with low debt levels, high return on invested capital and market leading positions should be increased. Examples of ETFs providing exposure to different variations of quality are FCF US Quality ETF, VanEck Morningstar Wide Moat, and iShares Edge MSCI World Quality Factor UCITS ETF.

The top 10 holdings in the FCF US Quality ETF (these are stocks should not be viewed as investment recommendations but a reflection of one interpretation of quality)

Source: FCF Funds

Looking across global industry groups we see the classic investor flows and behaviour with defensive industry groups such as Household & Personal Products, Utilities, Pharmaceuticals, Food, Beverage & Tobacco, and Commercial & Professional Services being relative stronger. The weakest segments of the market are Banks, Diversified Financials, Insurance, Energy, Real Estate, and Automobiles & Components. The list of stocks below are based on selecting the three largest companies from each of the best performing industry groups mentioned above.

  • Procter & Gamble
  • L’Oreal
  • Unilever
  • NextEra Energy
  • Duke Energy
  • Iberdrola
  • Johnson & Johnson
  • Novo Nordisk
  • Eli Lilly
  • Nestle
  • Coca-Cola
  • PepsiCo
  • Waste Management
  • RELX
  • ThomsonReuters

Finally, for those equity investors that simply wants to reduce overall risk short-term bonds should be considered.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.