“Nature hates miracles that last too long”

Camus wrote: “Nature abhors miracles that last too long.” How long can it unfold before our eyes?

In Europe and the United States, rising interest rates or falling activity are giving way to inflation without even appreciable increases in unemployment! Surprisingly, it remains at the lowest level: 6.5% in the euro zone, 3.6% in the US, according to Eurostat.

Thus, the labor market remains strong, wages are rising, especially in Europe, increasing the fixed costs of companies. That’s pressure on margins… But for companies, it’s also a necessary investment in a demographic context where the workforce is structurally expanding and the costs of talent acquisition and rotation are rising. Is the miracle of a soft landing, preventing inflation without destroying jobs, happening right before our incredible eyes?

The German chancellor wants to believe it: the economic slowdown will perhaps be weaker than expected, Germany should miraculously escape the vengeful god of recession, and this despite the guilt of making a deal with the Russian devil.

Investors should continue to see the inertial effect of inflation on the cost of goods sold over the past few months.

However, activity slowed in the fourth quarter: chemical company BASF (which succeeded Covestro in disappointing downward revisions to profit) experienced a volume decline that offset the positive impact of price increases billed to customers.

Moreover, with lower raw materials and observed or expected inflation indices (Germany’s losses are coming back around 2%), customers may be less inclined to accept further price increases in the future.

In the consumer sector, Fnac Darty in France reported a 55 million euro drop in sales in December, a key period for the distributor. America’s Procter & Gamble admitted to a 6% decline in volume in the last quarter.

Meanwhile, investors should continue to see the inertial effect of inflation on cost of goods sold (variable costs, or “COGS”) over the past few months.

We see a similar trend in Continental’s Contitech division, which is disappointing both in terms of margins and cash flow. Between September and December, the still strong growth in receipts leaves its mark.

Some companies in the same industry sector will do better than others and will be able to exploit their competitors’ weaknesses during economic downturns to strengthen their competitive advantages and capture market shares during economic recovery.

According to McKinsey, in a study of 1,200 companies, investors have historically favored managements that made the following decisions during periods of declining profits: increased earnings retention (reduced dividend distributions or reduced share buybacks), reduced leverage, R&D, Capex and M&A Rapid reinvestment as profit recovery promoted in Above all, the study concludes that a simple cost-cutting strategy is counterproductive.

Microsoft’s decision to cut its payroll by 5%, or 10,000 workers, may protect its margins in the short term, but could penalize the group’s competitiveness in the event of a faster or more dynamic recovery than expected, such as after the first series. arrests.

So, after a particularly favorable year for systematic funds, stock picking could return to its heyday in 2023.

For investors, after the start of the year (historical in European markets), it may be necessary to favor alpha over beta now.

With high valuation spreads, the European banking sector (50% discount compared to the rest of the market!) can present the same picture as the Atlantic.

So that explains the 12% difference between Morgan Stanley and Goldman Sachs on the same day when their results were published last Tuesday. Does 2022 herald a more fundamental stock-picking year than sector positioning?

With high valuation gaps (hidden cost of capital reaches 23-25% against an average of 17% for Societe Generale, Barclay’s), the European banking sector can offer (a 50% discount compared to the rest of the market!). Same show across the Atlantic.

Spanish and Swedish banks are opening a ball of publications. First to publish Bankinter offers a mixed view: the bulk of the gains from the recovery in interest margins (which helped analysts raise revenue expectations for the sector to €90 billion from 2022 to date and up to 2023) due to growth is consumed. operating costs.

Although the sector is not (at least directly) affected by the commodity rebound, rising wages and the cost of IT modernization projects are real concerns for both US and European banks.

Western finance no longer dominates

The sovereign wealth funds of Saudi Arabia, Qatar and Abu Dhabi now manage $3,500 billion, which is more than the GDP of Britain. The first Abu Dhabi bank also considered buying PJSC Standard Chartered.

In 2022 alone, funds from the Middle East invested $90 billion, including 16 in Europe, twice as much as in the U.S.… against the current position of asset managers: As Bank of America points out, they have never done this in America. they were not as overweight. Shares since October 2005.

The challenge for Saudi Arabia, which exports up to $1 billion a day in 2022, is more in its ability to find targets than to finance its purchases. The rise in oil and gas has boosted the holdings of sovereign wealth funds and their investments in oil-importing geographies…

WTI quality barrels have been recovering for several sessions. All futures payments through October 2023 are now above $80. The resilience of the European economy and the latest high-frequency data from China argue for a revival in mobility energy.

The Chinese are learning to live with the virus: participation in public places (such as cinemas) marked a strong start to the year. Traffic jams in cars and subways increase by 50%. With some estimates putting the contamination rate at 40%, we can assume that it will peak around the New Year and collective immunity may be observed sooner than expected (30 days…)

According to Goldman Sachs, the current price of Brent does not include increased demand for oil from China and assumes stable Russian supply.

But like the banking sector, which is held very little despite a good stock market, oil prices also show investors’ lack of confidence in economic growth, which is not unfounded, especially when they take a “bottom-up” approach, that is, observing the commercial activity of companies, especially in the consumer sector.

Conversely, the most optimistic scenarios come with the dreaded Sword of Damocles. Could the stronger-than-expected resilience of Western economies and China’s growth above 5% in 2023 reverse the overheating that central banks have been fighting for more than a year?

This may be the reason why the ECB groups, who are trying to dispel rumors of only a 25 basis point hike, are in turn intensifying the institution’s hawkish discourse. Christine Lagarde declares that the fight against inflation is not over. François Villeroy de Galhau ensures that sustainability strengthens the organization’s ability to deliver planned rate growth. Philip Lane argues that entry into restrictive territory on tariffs is inevitable. Pablo Hernandez de Jose guarantees significant increases. Finally, says Olli Rehn, “we can protect ourselves from a Volcker shock by acting quickly now.”

Given these commitment letters, the main risk today is that markets entered the monetary turnaround a little too quickly.

The ECB’s expected rate of 3.25% in May seems justified, but is it reasonable to expect a cut already in June? Is it consistent with the impending economic resilience and potential recovery of China, a leading raw material importer? Is it a miracle or an illusion to return to an inhabited area after just one year?

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