Stock market: winners and losers Stock market: winners and losers Stock market: winners and losers

Stock market: winners and losers

Macro 1 minute to read
Christopher Dembik

Head of Macroeconomic Research

The economic environment will remain uncertain in the coming months. The possibility of a recession in the USA and the debate about raising the debt ceiling will lead to increased volatility in equities in the short term. Added to this is the uncertainty surrounding monetary policy and the recovery in China. At the beginning of the year, one of the main arguments used by asset managers for their optimism was the Chinese recovery driven by consumption. It is slow to materialize. Instead of a recovery, we have an economy fueled by local government subsidies to exporters and a risk of deflation (a sign that consumption is faltering) coming to fruition. Another problem is the lack of understanding of monetary policy. The market is expecting the Federal Reserve (Fed) to cut interest rates for the first time in September, although the central bank is not considering that possibility this year. Either the market or the  Fed is wrong. In either case, we can expect an abrupt adjustment in interest rate change expectations. This will be another factor favoring a rise in volatility.

Since the beginning of the year, the Zurich Stock Exchange has posted a respectable performance of +7%. This is largely due to inflows. Since January, it has been observed that capital flows from the US are flowing out to Europe and being recycled there, often in search of higher yields. This is a structural factor in the rise of European equity markets, including the SMI. Although the trend is still favorable, shocks cannot be ruled out in the coming months, especially if the recession in the US is confirmed. Normally, the downward phase of the stock markets occurs between the time when the U.S. labor market enters a recession and the time when the Fed cuts key interest rates for the first time. There is no way the Swiss stock market can escape a bear market if the U.S. stock market declines. So it's a good time to add some protection to your portfolio.

In this context, we have selected four stocks that could be interesting:

- Richemont. The luxury goods group published solid results with an operating profit that exceeded expectations at over EUR 5 billion. Along the way, the company announced a special dividend of CHF1 per share (we'll come back to that in a moment). In addition to the group's good financial health, it could also be the subject of a takeover by LVMH. This rumor has been going on for several weeks. This is rather positive. There will definitely be some concentration ahead in the luxury goods sector. Many companies are flush with cash and are looking to invest it through acquisitions.

- Lonza. This is clearly not a neglected stock. Many investors have it in their portfolios. It is a major player in the medical device value chain and accompanies the big pharmaceutical companies. It is a long-term theme. No matter how the economy develops, the segment is interesting.

- Nestlé. The company has little debt, it is a growth stock with quite visible results. However, there is a catch: growth is mainly achieved through price. Pricing power accounts for about half of the group's growth, sometimes more. Nevertheless, in the short term, there are fears that margins could shrink as consumption slows down.

On the positive side, however, it is a security with very good credit quality. It is capable of easily weathering crises.

- Sika. This is a gem. The company is a global leader in specialty chemicals, particularly adhesives and sealants, with customers in the construction and automotive industries. It is very rare to have a company of such quality and sufficient size that is also a leader in all ESG issues and in climate and energy change issues. It's a nice long-term value for two reasons: (1) growing demand for insulation products, helped by the European Green Deal (construction accounts for 30% of total energy costs, so it's a critical element) and (2) growing exposure to the automotive sector (innovations to reduce the weight of vehicles and increase their range). From a financial perspective, it's also a nice company to be in. Sika has always grown faster than the market (6% on average over the last eight years compared to 2-5% for the industry as a whole) and has an above-market return on capital employed. We should also not forget that Sika is a major player in the consolidation of its sector and that its valuation is not too high. To watch.

The good old recipe for high-dividend stocks

Now is also a good time to introduce - if you haven't already - high dividend stocks at the bottom of the portfolio. This is a tool for diversification. In general, Swiss-listed companies such as Holcim (cement), Swiss Life and Swiss Re offer attractive dividends, regardless of the state of the economy. Outside of Switzerland, you may also be interested in some large and well-known stocks. There's LVMH, of course, with a 285% increase in dividends paid over five years. At L'Oréal, the dividend increase is 250% over the last five years. At Mastercard, it's even more, as the increase has been 300%. Broadcom (semiconductors) is only making (if you will) 185% over five years. This is a good way to get returns at low cost and diversify risk.

What about cash in all of this?

When investing, the rule is usually that you should hold no more than 5% of your portfolio in cash. This small percentage allows for arbitrage trades and to take advantage of opportunities in the stock market, such as when valuations are falling (this is often a good time to buy). In very rare exceptional cases, asset managers may hold more cash. For example, in 2022, some held as much as 10% of their portfolio in cash because they feared that the energy crisis would lead to a severe recession. However, this was not the case. Instead, 2022 was marked by a sharp decline in valuations of technology stocks, especially cloud stocks. This made it possible to position oneself in these stocks at the right time. The economic environment in 2023 is less characterized by an external shock and more by the fight against inflation and the implementation of an aggressive interest rate hike policy. This brings the opportunity to hold more cash than usual back to the forefront. Holding interest-bearing cash is, of course, better. In Switzerland, we did this unconditionally as soon as we could offer it (from the moment negative interest rates expired). On deposits in CHF, we offer an interest rate of 0.98%. However, it can be even more interesting to hold cash in foreign currencies (e.g. if the economic turmoil is confirmed, you should stay away from certain market segments, typically small and medium sized corporate stocks. Although there have been some good results in recent weeks, small and mid caps have performed poorly since the beginning of the year due to an accumulation of problems: Flight to quality and liquidity, low pricing power, far too many dilutive stocks (relying on convertible bonds). This will certainly not improve in the coming months. There will also be some large caps that could suffer from the deterioration of the economy. The best example is Adecco. Although we may well have a recession without unemployment (or at least a significant increase in unemployment), it is obvious that this will be rather negative for hiring and therefore for Adecco.

In the longer term: All to sport?

As part of a longer-term investment strategy, it is also possible to position yourself in key current themes such as the energy transition, artificial intelligence, etc., but make sure you know these areas well. Many companies claim to be in the artificial intelligence niche, but are far from it (they may also have high financing needs in an unfavorable environment). As for the energy transition, this is obviously a promising area for the future, but there is a risk of a bubble forming, especially with hydrogen. That's inherent in any systemic change. So it requires that you choose well the companies in which you want to position yourself. There is, on the other hand, a topic that we think is more interesting and that is often misjudged: Investments in sports and, in particular, in sports nutrition. This industry is a huge market (about $43 billion). The prospects are excellent. Analysts who follow the industry believe that the market size will double by 2030. It is a very large market. It includes supplements to boost performance and energy, hydration, proteins, and all foods for an audience that wants to watch their figure. You can find these products in different forms: Protein powders, energy bars, vitamins, minerals, caffeine in capsules and recently even caffeine gum. Until a few years ago, these products were primarily for elite athletes. Now it's a mass market, aimed at both the experienced athlete and people watching their figure. There is a real democratization of this market due to Covid and the ubiquity of social networks, which explains the enormous growth potential in the coming years. This segment is hardly represented on the Zurich stock exchange. One should rather look in the US, either at the big food stocks like Coca Cola or at niche companies whose only core business is sports nutrition, to better capture this investment theme. This is the case, for example, with Celsius Holding (listed on Nasdaq). It is not an investment theme that can particularly serve as protection in the event of a recession. But it is certainly an interesting return lever in a diversified allocation over the medium term.


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