‘Bayer could outperform the portfolio’
‘Pharmaceuticals and essential goods offer opportunities in the short term, but in the long term we prefer technology’
Key points
Inflation and uncertainty over interest rates are prompting a review of portfolio decisions. The market is focusing on companies’ ability to generate returns on capital, as well as on earnings growth. According to Carlo De Luca, head of investments at Gamma Capital Markets, this rotation may favour value stocks and Europe, whilst keeping the US at the centre of the allocation. In the short to medium term, the preference is for defensive sectors, with Bayer and Coca-Cola among the favoured picks. Long-term confidence in the technology sector remains, accompanied by a more selective approach.
Inflation is rising again, adding uncertainty to the path of interest rates. How much of an impact does this have on the stock market outlook?
At present, oil is clearly the most dangerous component of inflation and is pulling back from its highs in the hope that there will be no geopolitical escalation. Setting that aside, and given that we must contend with rising logistics costs due to the Strait of Hormuz remaining impassable, we believe that expectations of a more restrictive monetary policy will have a negative impact on both the equity and fixed-income components of the portfolio over the next 12 months.
What will change following the US mid-term elections? Which sectors stand to benefit?
The most obvious development is that renewable energy sources (above all, solar, hydrogen and uranium) have now been added to the shift already underway towards defensive assets such as pharmaceuticals and essential goods.Another sector that could benefit is banking, as the stimulus policies Trump would have implemented would have had a negative impact on both clients’ investment portfolios and those of the banks themselves (a factor that now significantly offsets even the increase in net interest income resulting from the rise in interest rates). As for technology companies, a distinction must be made between those that could continue to perform well (the hyperscalers that have already built their data centres) and those that, by supplying the equipment for the construction of data centres, now face the risk of being denied authorisation to build new ones.
Amid geopolitical tensions and rising costs, which businesses can protect their profit margins?
At this moment, rather than analysing how companies ensure growing margins, let us try not to lose sight of the paradigm shift that has already been evident for a few months: the market no longer looks solely at profit growth, but also at how capital is invested and how many years it takes for the investment to pay for itself. Consequently, we are focusing more on the ‘value’ aspect of companies than on their growth. We regard this as a bold shift in strategy that could also prove beneficial for the technology sector. After all, a rotation towards sectors that have lagged behind would help avoid a significant correction in share prices, which have now been characterised by two years of performance heavily concentrated in just a few stocks.
In the field of artificial intelligence, what sets apart the companies that are able to turn investments into profits?
It depends on the company’s financial strength. Those who spend less and burn through less cash, have already built their data centres, are less indebted and can sell new services to existing customers are in a privileged position.
