“Diageo shares have strong potential for a recovery”

The first part of the year saw artificial intelligence-related stocks perform particularly well. Now, however, the market appears to be entering a more selective phase, with a possible resurgence of value sectors. Frederic Moeremans d’Emaus, senior equity portfolio manager at Valori Asset Management, remains bullish on equities, whilst drawing attention to inflation, high bond yields and geopolitical tensions. Against this backdrop, diversification and stock picking are once again key.

The first half of the year was characterised by a strong thematic focus, centred on artificial intelligence and the associated capital expenditure, particularly in semiconductors and hardware. Demand for memory chips, for example, far outstripped supply, causing prices to soar and driving the SOX index up by around 100 per cent since the start of the year. In July, however, we saw a sharp correction in market leaders, despite a still-positive news flow. Value has made a comeback and we believe that doubts over whether Capex expectations may have peaked could further fuel this rotation. We will need to be increasingly selective, but we remain positive on equities, given the considerable strength shown by the market despite numerous headwinds, including such high bond yields.

The well-being of American consumers — and others — is being put to the test by persistent geopolitical tensions, persistently high energy prices and inflation — which amount to a hidden tax — and the risk of an overly restrictive monetary policy: one need only consider the 30-year Treasury yield, which is at its highest level in the last fifteen years. It is true that market performance has generated a wealth effect that has partly offset these trends.

The “Magnificent 7” have lost some of their appeal: the growth in investment has eroded their cash flow, and the increased reliance on the debt market has put pressure on their respective credit default swaps (CDSs), key indicators of risk in the credit sector. Leadership has thus shifted, since March, to those who have benefited from that spending. Today, the value segment is in fine fettle and we expect a recovery in shares with less hyperbolic growth profiles, but with strong valuation support. A return to diversification, with rigorous stock picking, is a must. As for European banks, despite the prolonged rally, they still have the wind in their sails: NPLs are at record lows, interest rates remain high, and cost-efficiency measures are in place.

European and American companies continue to show growth, both in terms of revenue and profits. Among the ‘Magnificent 7’, however, part of this performance stems from non-recurring items, such as revaluations of holdings in unlisted companies, which must be taken into account when assessing the quality of profits.