In the wake of the interest rate hikes, an economic recession looms. But this time there seems to be no profit dip. “There is no typical business cycle this time. The delayed effects of the pandemic, the impact of de-globalisation and the drive to decarbonise economies are part of why equity markets continue to perform so well despite slower growth,” said Helen Jewell, Fundamental Equities Investment Strategist for EMEA region at BlackRock in its Fourth Quarter Stock Market Monitor.
The economy was slowed down hard during Covid and growth picked up quickly after the pandemic and companies are still feeling that. That impact will last for years, Jewell said. “When economies slow down, cyclical companies are usually left with more inventory. To get rid of those stocks, discounts are often given on those products, which in turn puts pressure on results. But in the current cycle we see that there are sectors where this does not apply. Supply still cannot keep up with demand because the supply side never really recovered from the lockdowns. This applies, for example, to semiconductor products in the aerospace industry.”
Consumer spending remains stable for the time being, despite rising inflation and interest rates. This is also not common during a cyclical downturn, Jewell says. “This offers opportunities for stock pickers looking for high-quality companies in the consumer goods sector with attractive valuations. The word ‘quality’ is very important here because we are looking for companies that can handle a potential decline in consumer spending. This includes e-commerce and the travel industry.”
The cyclical wave for a number of industrial companies will be less intense if profits continue to rise. This is mainly due to two powerful trends, says Jewell: making the economy carbon neutral and deglobalization. “Governments are currently spending enormous amounts on the energy transition. Industrial companies can benefit from this, including by electrifying vehicles and the infrastructure required for this. During the pandemic it became clear how vulnerable supply chains are and in response many companies started manufacturing closer to home. Governments spend a lot of money on stimulating certain sectors, such as semiconductor manufacturers, because they are important to national security,” Jewell said.