“Shares are no longer dirt cheap, but there are still opportunities. We focus mainly on long-term trends and avoid the riskiest sectors, such as American regional banks and Office REITs,” says Laurence De Munter, investment strategist at Securities De Munter.
The year 2022 was particularly challenging for many investors. Both stocks and bonds were hit hard at the same time. A combination of financial turmoil that rarely occurs. “Many investors were still in full fear mode. The terrible investment year of 2022 had certainly left its mark.”
She also points out that many hedge funds were quite negative in sentiment and thus maintained high short positions. They incurred significant losses this year. “Therefore, they had to neutralize and reduce those short positions. This further supported the market, as it brought in additional buyers. Despite all the negativity, we were actually positive on stocks at the beginning of this year.”
This positive stance proved to be correct in the first half of the year, as the markets managed to recover. Looking back, De Munter notes that there was a reversal in various aspects of the markets. “Last year, oil and gas companies were the big winners, while technology stocks turned out to be the major losers. This year, it’s the opposite, and we see technology stocks making a comeback, driven by the AI hype. Similarly, in terms of currencies, you see something similar. Last year, the dollar performed well, while this year, the euro gained strength.”
Slowdown on the horizon
For the second half of the year, there is an expectation of an economic slowdown. “The economy did reasonably well in the first semester. But meanwhile, borrowing has become more expensive due to the tightening policies of central banks. We also see indications that banks have become stricter in lending. This will slow down growth,” says De Munter.
She points out that, apart from the crisis of American regional banks, we haven’t actually seen much impact from those higher interest rates. Many companies have used the years of low interest rates to secure financing. As a result, they didn’t immediately need refinancing.
“But at some point, many companies will have to extend their bonds again. The higher interest rates will then impact the economy. This shows that the real impact of higher interest rates is still ahead of us. This comes with a delayed effect. Therefore, we expect inflation to remain higher than the central banks’ targets for a longer period. Consequently, interest rates will also remain higher for a longer time.”
From trackers to individual holdings
In terms of asset allocation, the cash position was reduced in favor of higher-yielding alternatives. “We bought more bonds and placed our cash in term deposits, which currently provide a good return. Short-term bonds are also interesting due to the higher short-term yields, caused by the inverse yield curve. We’re also investing in duration, given the possibility of a recession.”
In the portfolios, certain trackers were replaced by individual holdings. “Even though ETFs offer low costs, individual positions are still the most attractive to us, as their Total Expense Ratio (TER) is 0 percent. So, conviction and stock picking remain important. Just look at the US, where the broad market was largely driven by a limited number of stocks. The so-called Magnificent Seven make up almost a third of the S&P500 Index. We prefer to invest directly in stocks that have a competitive advantage and a high market share.”
On a regional level, there’s an underweight position on China due to ongoing issues. For Europe, the sentiment is positive, and for the United States, it’s neutral. “There’s too much uncertainty about China, and I don’t see that disappearing at the moment. We’re still positive about Europe; the valuations and dividends are still attractive. For the United States, we’re neutral compared to the MSCI World Index, where the weight is about 65 percent. Here, we’re a bit more cautious due to the elevated valuations, but the future growth potential is likely higher,” concludes De Munter.