Head of Equity Strategy
Summary: In today's equity note we show what equity themes have worked well over the past year with rising inflation and interest rates and it is clear that portfolios consisting purely of growth stocks must diversify into themes such as commodity sector, logistics, semiconductors, financial trading, mega caps, travel and defence. Adding these themes will diversify equity portfolios and make them able to absorb inflationary pressures while also reducing the sensitivity to higher interest rates.
Theme basket performance shows what works during inflation
With inflationary pressures evident everywhere in the world, having caused the Fed to make its hardest U-turn on inflation and interest rates since the 1970s, investors must build portfolios around the idea that the inflation rate is here to stay at a higher level than the previous 30 years. The impact on equities from higher inflation and interest rates have been felt across our Bubble Stocks, NextGen Medicine, E-commerce, Green transformation, Gaming, Payments, and 3D Printing theme baskets. The denominator for all of these themes have been excessive expectations and thus prohibitively high equity valuations.
As our theme baskets also show during rising inflation expectations and interest rates themes such as the commodity sector, logistics, semiconductors, financial trading, mega caps, travel and defence have done well. We also believe the cyber security basket could be added as an inflation basket as cyber security is less correlated to the economic cycle because it has become a necessity and thus the industry has pricing power.
Commodity sector is the best performing theme and must own sector
Our Commodity Sector basket is especially interesting this year being the best performing basket up 3.4%. Given the bloodbath in growth stocks having had exposure to commodities would have shielded some of the impact from the Fed’s December pivot on interest rates and inflation. Our view is that most retail investors have a too high exposure to growth stocks but instead of panicking and selling their stocks they should instead balance their portfolios across components that can do well during inflation.
The table below shows the constituents in our Commodity Sector basket which covers companies across agriculture, chemicals, energy and mining. There are also plenty of ETFs covering commodity futures, the energy sector, agriculture sector and mining companies.
| Name | Category | Sub-category | Mkt cap (USD, mn.) | Sales growth (%) | EBITDA growth (%) | Diff to PT (%) | 5Y return (%) |
| Deere & Co | Agriculture | Machinery | 114,723 | 23.9 | 44.4 | 8.4 | 274.8 |
| Corteva Inc | Agriculture | Seeds and crops protection | 33,600 | 9.9 | 83.6 | 17.4 | NA |
| Archer-Daniels-Midland Co | Agriculture | Integrated agribusiness | 40,431 | 32.5 | 28.5 | 0.4 | 88.9 |
| Nutrien Ltd | Agriculture | Agricultural chemicals | 39,853 | 20.8 | 112.0 | 17.1 | NA |
| Kubota Corp | Agriculture | Machinery | 24,908 | 17.7 | 41.2 | 14.9 | 42.1 |
| Bunge Ltd | Agriculture | Integrated agribusiness | 13,531 | 39.2 | 80.4 | 5.9 | 64.2 |
| WH Group Ltd | Agriculture | Meat processing | 8,382 | 3.9 | -1.9 | 59.8 | 2.1 |
| Wilmar International Ltd | Agriculture | Integrated agribusiness | 19,691 | 27.4 | 13.6 | 39.4 | 26.0 |
| Muyuan Foods Co Ltd | Agriculture | Pigs and feed products | 43,894 | 54.0 | NA | 35.6 | 909.5 |
| Inner Mongolia Yili Industrial Group Co Ltd | Agriculture | Dairy products | 38,310 | 13.4 | NA | 34.4 | 135.8 |
| Ingredion Inc | Agriculture | Sweeteners and starches | 6,265 | 13.3 | -23.8 | 17.5 | -16.3 |
| Linde PLC | Chemicals | Industrial gas | 157,202 | 10.0 | 22.5 | 18.6 | 182.6 |
| Air Liquide SA | Chemicals | Industrial and health care gases | 81,048 | -0.9 | 3.2 | 12.9 | 102.5 |
| BASF SE | Chemicals | Diversified chemicals | 69,889 | 29.0 | 64.4 | 16.8 | -6.1 |
| Air Products and Chemicals Inc | Chemicals | Industrial gas | 61,276 | 16.6 | 2.9 | 20.7 | 118.8 |
| DuPont de Nemours Inc | Chemicals | Diversified chemicals | 39,759 | 2.2 | 819.5 | 25.5 | -2.0 |
| Wanhua Chemical Group Co Ltd | Chemicals | Diversified chemicals | 45,373 | 91.3 | NA | 63.5 | 424.9 |
| Chevron Corp | Energy | Integrated oil & gas | 255,785 | 29.2 | 66.7 | 3.0 | 45.7 |
| Exxon Mobil Corp | Energy | Integrated oil & gas | 314,004 | 23.1 | 65.8 | 1.3 | 12.7 |
| Shell PLC | Energy | Integrated oil & gas | 198,087 | -0.2 | 6.3 | 13.3 | 16.3 |
| TotalEnergies SE | Energy | Integrated oil & gas | 153,530 | 23.7 | 53.7 | 3.9 | 49.4 |
| PetroChina Co Ltd | Energy | Integrated oil & gas | 143,886 | 12.2 | NA | 19.8 | -19.5 |
| Enbridge Inc | Energy | Transportation | 83,675 | 7.7 | 5.0 | 6.8 | 26.4 |
| Neste Oyj | Energy | Refining and marketing | 31,728 | 3.4 | -16.0 | 51.5 | 285.6 |
| ConocoPhillips | Energy | Exploration and production | 114,828 | 72.4 | 122.1 | 9.7 | 101.8 |
| Phillips 66 | Energy | Refining and marketing | 37,266 | 24.0 | 52.2 | 13.9 | 24.9 |
| Schlumberger NV | Energy | Oilfield services and equipment | 55,855 | -2.8 | NA | 7.1 | -44.3 |
| Koninklijke Vopak NV | Energy | Tank terminal operator | 4,251 | 0.3 | -36.3 | 40.9 | -20.0 |
| BHP Group PLC | Metals and mining | Iron ore and copper | 163,748 | 41.7 | 66.1 | -5.1 | 142.3 |
| Rio Tinto PLC | Metals and mining | Iron ore and aluminium | 121,481 | 39.5 | 100.4 | -3.6 | 135.8 |
| Vale SA | Metals and mining | Iron ore | 79,707 | 77.2 | 160.4 | 12.0 | 95.6 |
| Southern Copper Corp | Metals and mining | Copper | 49,949 | 39.7 | 82.4 | -8.0 | 103.2 |
| Newmont Corp | Metals and mining | Gold | 49,194 | 10.2 | -3.4 | 5.6 | 101.9 |
| MMC Norilsk Nickel PJSC | Metals and mining | Palladium, nickel and copper | 44,422 | 27.1 | 85.7 | 20.0 | 187.4 |
| Anglo American PLC | Metals and mining | Platinum, Copper and iron ore | 56,282 | 59.0 | 143.8 | -3.1 | 221.0 |
| Glencore PLC | Metals and mining | Energy and metals | 71,259 | -7.5 | 28.1 | 7.8 | 43.9 |
| ArcelorMittal SA | Metals and mining | Steel | 27,940 | 28.1 | 940.4 | 49.1 | 19.9 |
| POSCO | Metals and mining | Steel | 18,648 | 32.2 | 102.1 | 69.4 | 11.2 |
| MP Materials Corp | Metals and mining | Rare earth minerals | 6,932 | NA | NA | 26.7 | NA |
| Lynas Rare Earths Ltd | Metals and mining | Rare earth minerals | 5,745 | 60.3 | 306.9 | 11.0 | 947.6 |
| Aggregate / median | 2,926,332 | 23.7 | 59.0 | 14.4 | 64.2 |
In our recently published Quarterly Outlook Q1 2022 we highlight the global energy sector as a sector with a strong expected return. The global energy sector has a shareholder yield (dividends + buybacks) of 5% and with an annualized growth rate of 5.1% in dividends and buybacks the sector has an expected return of around 10%, which is quite attractive in an inflationary environment because higher inflation will lift the price of energy and thus preserve purchasing power of capital.
Financial trading firms and market makers as hedging
Another interesting theme during rising interest rates and inflation are financial trading firms. These companies benefit from higher interest rates which in turn creates more market volatility which they also benefit from. In our view, financial trading firms will add great diversification to equity portfolio during inflationary pressures. The list below shows the constituents in our Financial Trading theme basket.
| Name | Segment | Mkt Cap (USD mn.) | Sales growth (%) | EPS growth (%) | Diff to PT (%) | 5yr return |
| Morgan Stanley | Institutional brokerage | 177,501 | 16.1 | 25.8 | 14.3 | 158.2 |
| Charles Schwab Corp/The | Multi brokerage | 170,173 | 56.9 | 32.3 | 13.3 | 126.2 |
| Goldman Sachs Group Inc/The | Institutional brokerage | 119,730 | 21.5 | 88.3 | 30.0 | 57.9 |
| S&P Global Inc | Financial information | 95,807 | 10.5 | 16.4 | 26.2 | 245.5 |
| Hong Kong Exchanges & Clearing Ltd | Exchange & clearing | 74,106 | 23.5 | 22.5 | 15.1 | 171.5 |
| CME Group Inc | Exchange & clearing | 79,115 | -5.7 | -6.0 | 6.9 | 114.8 |
| Intercontinental Exchange Inc | Exchange & clearing | 68,820 | 23.2 | 9.3 | 27.1 | 124.5 |
| Coinbase Global Inc | Exchange (crypto) | 38,444 | 649.5 | NA | 95.3 | NA |
| London Stock Exchange Group PLC | Exchange & clearing | 52,192 | 105.7 | 16.1 | 30.1 | 138.7 |
| CITIC Securities Co Ltd | Institutional brokerage | 53,165 | 26.0 | 36.4 | 18.0 | 52.3 |
| MSCI Inc | Financial information | 40,575 | 20.5 | 27.0 | 38.1 | 525.8 |
| Deutsche Boerse AG | Exchange & clearing | 33,138 | 4.4 | 7.2 | 9.8 | 117.2 |
| Interactive Brokers Group Inc | Multi brokerage | 27,993 | 18.5 | 36.8 | 50.0 | 84.6 |
| Nasdaq Inc | Exchange & clearing | 28,344 | 17.8 | 11.1 | 23.7 | 170.6 |
| MarketAxess Holdings Inc (*) | Electronic bond platform | 12,650 | 1.4 | -14.3 | 15.2 | 91.3 |
| Tradeweb Markets Inc | Electronic bond platform | 19,103 | 20.5 | 38.4 | 24.1 | NA |
| Raymond James Financial Inc | Institutional brokerage | 20,440 | 25.1 | 96.8 | 28.8 | 109.3 |
| Japan Exchange Group Inc | Exchange & clearing | 10,576 | 2.3 | 1.5 | 16.1 | 66.9 |
| LPL Financial Holdings Inc | Institutional brokerage | 13,050 | 25.6 | 7.1 | 29.2 | 346.0 |
| Cboe Global Markets Inc | Exchange & clearing | 12,248 | 13.5 | 6.6 | 21.0 | 57.6 |
| Euronext NV | Exchange & clearing | 9,970 | 38.5 | 16.2 | 29.7 | 141.6 |
| Virtu Financial Inc | Market-making | 5,329 | -6.2 | -36.4 | 9.5 | 104.6 |
| Avanza Bank Holding AB | Retail brokerage | 4,735 | 40.2 | 48.7 | 28.2 | 301.7 |
| Nordnet AB publ | Retail brokerage | 3,823 | 48.5 | 38.5 | 50.5 | NA |
| IG Group Holdings PLC | Retail brokerage | 4,994 | 10.9 | 12.0 | 21.7 | 115.3 |
| flatexDEGIRO AG | Retail brokerage | 2,148 | 131.7 | 61.6 | 90.8 | 406.2 |
| Swissquote Group Holding SA | Retail brokerage | 2,489 | 47.6 | 115.6 | 48.8 | 569.6 |
| Monex Group Inc | Retail brokerage | 1,289 | 75.3 | 445.4 | 58.8 | 98.2 |
| CMC Markets PLC | Retail brokerage | 928 | -17.1 | -44.3 | 43.5 | 173.1 |
| Flow Traders | Market-making | 1,771 | -46.0 | -54.6 | 1.7 | 52.4 |
| Aggregate / median values | 1,184,646 | 21.0 | 16.4 | 26.6 | 124.5 |
Finally, we believe investors should consider adding market makers to their portfolio as insurance components against tail-risk losses (big declines) in the portfolio. There are essentially two publicly listed market makers in the world (Flow Traders and Virtu Financial), and we wrote two notes (here and here) last year about their hedging capabilities during equity selloffs. This year they have proven that the idea is not a bad one.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
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