Head of Saxo Strats
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
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)
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.
Finally, for those equity investors that simply wants to reduce overall risk short-term bonds should be considered.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
