UBP: Market Correction Not Over Yet

Stock markets might continue to display volatility for a couple more weeks before it is time to snap up bargain stocks, says UBP's Eleanor Taylor Jolidon

David Brenchley 20.11.2018
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Volatility, stock market, equities, correction, stormy weather

Investors may have to suffer more short-term pain before stock market volatility improves, but now is no time to abandon equities says one Swiss asset manager.

That’s the view of Eleanor Taylor Jolidon, senior managing director for equity portfolio management at Union Bancaire Privee.

Taylor Jolidon, who manages the Morningstar Bronze Rated UBAM Swiss Equity fund, predicts a couple more weeks of sharp market movements ahead before we see a gradual reduction in volatility.

Then, she will look to reposition in some of the stocks that have been hit hardest, namely the more cyclical ones, as well as small and mid caps.

Despite the expected bumps in the road, Taylor Jolidon is still bullish on the outlook for equities. She notes that the market is currently being driven by price to earnings multiple compression - when a stock's earnings rise but the share price fails to follow suit - rather than earnings downgrades. “That gives me optimism that we still have opportunities for growth going into 2019,” she adds.

The fund manager admits to being surprised stocks have continued to fall considering valuation levels had been in line with long-term averages, but there are some good reasons for it. “It suggests that the market has some doubts as to the sustainability of the very high level of earnings that we have seen in 2017 and going into 2018,” she explains.

Certainly, there’s some that expect US earnings and GDP growth to slow around 2020 as President Donald Trump’s tax reforms roll off.

That said, Tax Reform 2.0 is rumoured to be in the pipeline for next year, which could extend the cycle further. “Whether that is possible to put through is open to debate.” We should have some idea after November’s mid-term elections.

While political trouble-points are unlikely to fade and have taken a more confrontational shape than previously, the macro-economic environment looks positive for stocks.

While it’s been a long cycle, it’s also been a relatively shallow cycle, Taylor Jolidon explains: “By that I mean there aren’t very many areas in the economic environment globally where you can see there’s been an over-extension where we have bubbles, or overspend on capex.”

A return to full employment in developed countries, not seen since the 1970s, is seen as a positive, for companies as well as consumers. True, raw materials prices and wages are on the rise, but relatively modestly. And the latter should help firms offset the former by making it less painful to pass through price increases to consumers.

Taylor Jolidon also states that when you have a little bit of inflation combined with rising interest rates, it tends to be a good time to invest in equities. Therefore, she continues, “we have reasons to believe that, after this correction on the multiple, it should continue to be quite interesting to invest in equity”.

Opportunities in Luxury Goods and Utilities

Taylor Jolidon co-manages the UBAM 30 Global Leaders Equity fund, which has beaten the S&P 500’s return in sterling terms in the year-to-date and over a one-year period and has kept pace over five years. That’s despite running without an overweight to tech names during that period.

The fund process, similarly to the Swiss Equity offering, focuses on companies that exhibit a high cash flow return on investment.

Recently, the Global portfolio has been increasingly looking towards companies that are able to generate a high, stable return on investment. Two areas that stand out are healthcare and industrials, particularly in the US.

Meanwhile, luxury goods companies such as LVMH (MC), Estee Lauder (EL) and L’Oreal (OR) have proved a good hunting ground. “They have the wonderful trinity of international positioning, so you’re facing growth markets; a highly differentiated product, which means you’ve got very high barriers to entry; and a strong brand, which is aspirational for consumers.”

Utilities are also an area of interest, but those that have above-average growth. Examples of these are renewable energy provider NextEra (NEE) and solar energy technology platform Solaredge (SEDG).

Meanwhile, the fund has been and is staying “resolutely overweight US”. “We consider that the US is the more interesting of the markets to be exposed to at the moment.” That’s in large part due to the continued earnings upgrades seen, compared to downgrades in parts of the eurozone.

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David Brenchley  is a Reporter for Morningstar.co.uk

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