Safer ground?

Safer ground?

02 August 2022

During July, the stock market has stabilised, and we have seen big rises in individual stocks that had previously fallen sharply. Now we are fast approaching autumn and the cold is getting closer. There are low levels of natural gas supplies in Europe and with current flows from Russia, things are not looking any brighter ahead of winter. Estimates from analysts suggest that growth in Europe will land around 0% ahead of next year and the EU's own estimates suggest a sharp slowdown in growth across much of Europe.

Rising inflation is leading to higher interest rates for both individuals and businesses. Many tech companies that have undergone a more expansive phase of acquisitions and expansion into new markets have taken on ever larger loans and consequently increased exposure to interest rate rises. In addition, several companies that have recently gone public relatively quickly, these companies have also never experienced high interest rates and the impact it has on their business. Some of these companies have built part of their business on aggressively expanding and taking market share and therefore have never weighed potential interest rate rises and economic downturn into the equation when decisions were made. We have found ourselves in a climate where new start-ups driven by young entrepreneurs with a strong desire to succeed have received large investments from institutional investors regardless of whether they show positive earnings. This has been seen in the Swedish market, where companies such as Klarna recently raised even more capital while making massive cuts to its workforce. These increased borrowings and demands for improved results from investors will perhaps be seen in companies' upcoming reports and developments during the autumn and winter. Private investors have also benefited from companies that have expanded strongly, such as SBB, as they have seen the biggest increase in stock prices after the pandemic but also the biggest fall during the ongoing inflation crisis.

Many investors have long discounted companies with a long history of delivering results and stable performance. These companies have generally had stable cash flows over the years but with a more disappointing performance of the stock for investors. The business models are tried and tested and there is expertise within the company on how to weather financial setbacks and crises such as the 2008 financial crisis. In addition, many companies are in a very good financial position and there is not a major shortage of capital for many companies included in the S&P500 index. However, the question is how this capital can be used at a time when economic growth is slowing and it is harder to justify certain investments. 

Nordic stock markets did well in 2021, but this year they have been even more sluggish with greater uncertainty in the region and weaker economies. The US markets have always been seen as a safer investment during more tumultuous times and it does so now. With the recent sharp decline, there are more stocks with more reasonable Price/Earnings (P/E) ratios and more upside based on models that can be used to value a company. Uncertainty about the future remains and we may not have reached the bottom yet but for an investor who doesn't want to sit with all their money in a bank account, this may be the way to go.

Companies that might be interesting to take positions in today are for example, Caterpillar which has a P/E of 16 and made a report that was in line with expectations, Exxon Mobil which broke records for Q2 and has a P/E of 10, Texas Instruments which also reported a better result than expected but with a slightly higher P/E of 20. Other US companies that might be interesting: Microsoft, Mastercard and Regeneron Pharmaceuticals.

Important legal information

Legal notice

This information is neither an investment advice nor an investment or investment strategy recommendation, but advertisement. The complete information on the trading products (securities) mentioned herein, in particular the structure and risks associated with an investment, are described in the base prospectus, together with any supplements, as well as the final terms. The base prospectus and final terms constitute the solely binding sales documents for the securities and are available under the product links. It is recommended that potential investors read these documents before making any investment decision. The documents and the key information document are published on the website of the issuer, Vontobel Financial Products GmbH, Bockenheimer Landstrasse 24, 60323 Frankfurt am Main, Germany, on prospectus.vontobel.com and are available from the issuer free of charge. The approval of the prospectus should not be understood as an endorsement of the securities. The securities are products that are not simple and may be difficult to understand. This information includes or relates to figures of past performance. Past performance is not a reliable indicator of future performance.

12/08/2022 17:48:12

 

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