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MONTHLY INVESTMENT BRIEF
NOVEMBER 2021
Laurent Denize,
GLOBAL CIO
We maintain our constructive view on risky assets. The recent decline in long rates is giving risk premia some breathing space. We are taking a long equity, short duration stance.
Last month we were wondering about companies’ ability to maintain their margins in the face of rising input costs. The answer is crystal clear, we are witnessing a spectacular earnings season.
In Europe, 60% of companies have released their figures. EPS data disclosed so far came in 10% above consensus estimates. The consensus now expects EPS to rise by 60% (yes, you read that correctly) year-on-year in 2021 (+15% from 2019 levels).
This is even more impressive in the US.
Across all sectors, the impact of rising raw material costs was limited. Indeed, most of them were able to increase prices to cope with rising costs. But the negative effect could be more significant in the coming months in key sectors such as automotive, capital goods, food and consumer staples. Only two sectors appear to be benefiting fully from supply chain bottlenecks: semiconductors and transport, with high demand and limited capacity pushing up prices.
COVID has caused a lot of disruption, particularly in sectors such as automotive, where demand collapsed in 2020 but then rebounded strongly in 2021. This combined shock to both supply and demand has generated capacity adjustment problems, in addition to a more structural trend of adapting and securing supply chains. Thus, de-globalisation is a major trend and some countries, such as the United States, are trying to relocate their production.
There are two main reasons for this:
The desire to be less dependent on China as a trading partner, initiated by Mr Trump, and also pursued by the new US administration as well as by other countries.
Decarbonization. Consumers (especially younger ones) are much more sensitive to ESG issues -mostly environmental- and are pushing for manufacturers to reduce their transport costs in order to reduce their carbon footprint.
Rising raw material costs have recently been followed by across-the-board price increases that are passed on to consumers. However, manufacturers are also looking at ways to refocus their production, towards those products for which end demand is least price sensitive, thereby offsetting lower volumes with higher margins (reducing their carbon footprint in the process). For example, some car manufacturers appear to be restricting the production of low-margin cars, allowing them to use the chips in high-end cars with higher margins and thereby optimizing their product mix.
In addition, European manufacturers are sourcing more materials and production from North Africa and other emerging markets and moving away from China to reduce transport costs.
All in all, we maintain our constructive view on risky assets. The recent decline in long rates is giving risk premia some breathing space. We are taking a long equity, short duration stance. However, we are cautious of certain valuations that are already too stretched in view of the still buoyant macroeconomic cycle. We favour cyclical stocks, following a slight decrease in response to the fall in interest rates. As for emerging markets, valuations are looking more attractive, but the long-awaited signal of a Chinese recovery is yet to materialise. So, some patience is required here.
We are adding convexity to portfolios by buying volatility in bonds, equities and currencies. The current performance permits to give up a little bit of premium in order to preserve what has been achieved, as the recent trajectory has been, in our opinion, a little too straight, so some slight consolidation might be in the cards over the next few months... time to catch our breath.
With less support from central banks, we are entering a new, probably more volatile era, where alpha will rise to its former glory. A more responsive and tactical positioning is therefore recommended.