The global economy and the corporate sector are currently being hit by a long list of problems: the ongoing pandemic, fragile value chains, high inflation rates, monetary tightening, and the war in Ukraine. Taken separately, the problems are already disruptive, but in combination they create a complex and adverse environment. In this economically tense situation, it is all the more important to use a fundamental approach to select those companies that are likely to emerge from the crisis in a stronger position.
The recovery from the pandemic has been interrupted and/or curbed by the war in Ukraine. According to current assessments by the International Monetary Fund (IMF), the global economy continues to show positive growth, but its speed has slowed down significantly. Due to Europe’s high level of dependency, the war is having a particular impact on the continent’s energy and commodity costs. In addition, China’s current zero Covid-19 strategy is resulting in renewed dislocations in the value chains. The European and US central banks are under pressure to tighten their monetary stance significantly, among other things by raising interest rates, as we are currently seeing in the US. In light of this, the equity markets may be seen as losers, but is that really the case?
This volatile phase has favoured defensive sectors (“safe havens”) and commodity companies, as well as oil and gas companies. Nevertheless, caution is advised, as the valuations of the defensive companies have already risen significantly. Moreover, it is unclear to what extent commodity, as well as energy producers, will suffer from swing producers and from a weakening macroeconomic environment. In our view, the second tier of profiteers is much more interesting, i.e. cyclicals with pricing power and small and mid-cap niche specialists. They trade at a low level compared to the overall market and, despite an inflationary environment, they can increase or protect their turnover and profits through price increases. This pricing and profit framework results from different qualitative and quantitative factors. In the first place, the factors include the general pricing power, due to high market share and the ability to enforce these by means of price increases. Second, input costs are important, i.e. raw material and energy costs, as well as the degree of processing automation. And finally, how dynamically can costs be controlled in order to protect margins? Often underestimated here is the established cost culture. Companies that define continuous improvement of cost efficiency as a goal come out of a crisis much stronger.
The current war in Ukraine will also lead to some structural changes. Inflation rates will be structurally higher than in the past decade, which was characterised by low volatility and global cost optimisation. Based on their experiences from the pandemic, companies have already started to diversify their value chains by relocating operations to neighbouring or nearby regions. A more diversified supplier base is another aspect that is driving up inflation. These changes are usually accompanied by higher production costs, which ultimately need to be borne by the end consumer. A new inflationary component, particularly in industrialised countries, is the shortage of skilled workers. This ranges from truck drivers to IT experts, and leads to stronger wage increases than in the past. Overarching geopolitical tensions, particularly with Russia, are causing further strains. The system is changing from global, cost-efficient, “just-in-time” value chains to “just-in-case”. In the latter, the reliability and resilience of the value chain has priority.
Companies that operate globally and tap into new markets are much better equipped to deal with adversity. In addition, a large number of small and mid-cap enterprises (SMEs) are owner or family-run and have robust balance sheets. They were able to use this advantage during the pandemic and continue to invest in products and services, so that they ultimately came out of the crisis stronger. In contrast to the pandemic, the sanctions against Russia will remain in place over the long term, even if the war in Ukraine hopefully ends soon. This will have implications for companies and for society, as we are already seeing in the value chains. Despite the short-term volatile phase of the global economy, we do not expect a significant recession unless the war spreads. The current share price valuation of cyclicals and SMEs allows for similar investment opportunities to those at the beginning of the pandemic. A large number of SMEs are trading at significant valuation discounts in an undiversified sell-off and this offers the opportunity to acquire high-quality companies for an attractive price.
Authors: Thomas Meier und Christos Sitounis, Portfolio Managers of the MainFirst Global Dividend Stars and the MainFirst Euro Value Stars
DISCLAIMER
This is a marketing communication.
This marketing communication is for information purposes only and provides the addressee with guidance on our products, concepts and ideas. This does not form the basis for any purchase, sale, hedging, transfer or mortgaging of assets. None of the information contained herein constitutes an offer to buy or sell any financial instrument nor is it based on a consideration of the personal circumstances of the addressee. It is also not the result of an objective or independent analysis. MainFirst makes no express or implied warranty or representation as to the accuracy, completeness, suitability, or marketability of any information provided to the addressee in webinars, podcasts or newsletters. The addressee acknowledges that our products and concepts may be intended for different categories of investors. The criteria are based exclusively on the currently valid sales prospectus. This marketing communication is not intended for a specific group of addressees. Each addressee must therefore inform themselves individually and under their own responsibility about the relevant provisions of the currently valid sales documents, on the basis of which the purchase of shares is exclusively based. Neither the content provided nor our marketing communications constitute binding promises or guarantees of future results. No advisory relationship is established either by reading or listening to the content. All contents are for information purposes only and cannot replace professional and individual investment advice. The addressee has requested the newsletter, has registered for a webinar or podcast, or uses other digital marketing media on their own initiative and at their own risk. The addressee and participant accept that digital marketing formats are technically produced and made available to the participant by an external information provider that has no relationship with MainFirst. Access to and participation in digital marketing formats takes place via internet-based infrastructures. MainFirst accepts no liability for any interruptions, cancellations, disruptions, suspensions, non-fulfilment, or delays related to the provision of the digital marketing formats. The participant acknowledges and accepts that when participating in digital marketing formats, personal data can be viewed, recorded, and transmitted by the information provider. MainFirst is not liable for any breaches of data protection obligations by the information provider. Digital marketing formats may only be accessed and visited in countries in which their distribution and access is permitted by law.
For detailed information on the opportunities and risks associated with our products, please refer to the current sales prospectus. The statutory sales documents (sales prospectus, key investor information documents (KIIDs), semi-annual and annual reports), which provide detailed information on the purchase of units and the associated risks, form the sole authoritative and binding basis for the purchase of units. The aforementioned sales documents in German (as well as in unofficial translations in other languages) can be found at www.mainfirst.com and are available free of charge from the investment company MainFirst Affiliated Fund Managers S.A. and the custodian bank, as well as from the respective national paying or information agents and from the representative in Switzerland. These are:
Austria: Raiffeisen Bank International, Am Stadtpark 9, A-1030 Wien, Österreich; Belgium: ABN AMRO, Kortijksesteenweg 302, 9000 Gent, Belgium; Finland: Skandinaviska Enskilda Banken P.O. Box 630, FI-00101 Helsinki, Finland; France: Société Générale Securities Services, Société anonyme, 29 boulevard Haussmann, 75009 Paris, France; Germany: MainFirst Affiliated Fund Managers (Deutschland) GmbH, Kennedyallee 76, D-60596 Frankfurt am Main, Deutschland; Italy: Allfunds Bank Milan, Via Bocchetto, 6, 20123 Milano MI, Italy; Lichtenstein: Bendura Bank AG, Schaaner Strasse 27, 9487 Gamprin-Bendern, Lichtenstein; Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison | L-1445 Strassen; Portugal: BEST - Banco Eletronico de Servico Toal S.A., Praca Marques de Pombal, 3A,3,Lisbon; Spain:Societe Generale Sucursal en Espana, Plaza Pablo Ruiz Picasso, 1, 9th floor, 28020 Madrid, Spain; Sweden: MFEX Mutual Funds Exchange AB, Grev Turegatan 19, Box 5378, SE-102 49, Stockholm, Sweden; Switzerland: UBS Fund Management AG, Aeschenplatz 6, 4052 Basel, Switzerland; UK: Société Générale Securities Services, Société Anonyme (UK Branch), 5 Devonshire Square, Cutlers Gardens, London EC2M 4TL, United Kingdom
The investment company may terminate existing distribution agreements with third parties or withdraw distribution licences for strategic or statutory reasons, subject to compliance with any deadlines. Investors can obtain information about their rights from the website www.mainfirst.com and from the sales prospectus. The information is available in both German and English, as well as in other languages in individual cases. Explicit reference is made to the detailed risk descriptions in the sales prospectus.
This publication is subject to copyright, trademark and intellectual property rights. Any reproduction, distribution, provision for downloading or online accessibility, inclusion in other websites, or publication in whole or in part, in modified or unmodified form, is only permitted with the prior written consent of MainFirst.
Copyright © 2022 MainFirst Group (consisting of companies belonging to MainFirst Holding AG, herin „MainFirst“). All rights reserved.
