Where do houses bet against uncertainty?

Of Eleftheria Kourtali

The “clouds” continue to be concentrated above the markets, with developments on the geopolitical front and the energy crisis keeping investors nervous, volatility soaring and any forecasts for the coming period uncertain. The big investment houses, although they recommend caution, consider that the investment opportunities in the current environment are abundant and do not consider that the escape from the markets or the panic is the appropriate strategy. In this context, the Greek Stock Exchange, after an impressive course of autonomy and rally to pre-war levels in Ukraine, also experienced international shocks, with analysts however estimating that the positive momentum and prospects are not reversed – thanks to strong course of banks – however, instability will remain a key “ingredient”.

UBS: The “wise” investment strategy

In the face of geopolitical risks, growth threats from China’s lockdowns and uncertainty about the prospect of an over-tightening by the Fed, stock markets are likely to remain volatile, UBS said in a new strategy report. As the Fed maintains its aggressive inflation rhetoric until the data clearly supports the Swiss bank’s forecast for lower inflation, fears of a recession due to the Fed or geopolitical developments will remain high.

Developments in Russian gas exports to Europe are a reminder of the possibility of escalation of the war in Ukraine leading to much higher energy prices in this market in the short term, according to UBS. “We continue to recommend exposure to commodity and energy stocks, because they are expected to do well even in a negative scenario around geopolitical developments,” the bank said. However, he added, Europe still has many diplomatic and fiscal responses to prevent an energy recession. Therefore, the recession in Europe is not a key scenario for UBS.

“Given the above, what is the ‘wise’ investment strategy?” The bank notes. pre-pandemic. “In an environment of moderate growth and inflation, we believe that stock markets will end the year higher,” he said.

Expectations of the Fed’s policy course have been assessed in the market and the risks to the profitability of listed companies have increased. Therefore, UBS recommends turning to market sectors that can perform well in an environment of high inflation, rising interest rates and increased volatility.

Commodities offer diversification benefits and have historically performed well during periods of high inflation. “We see room for another 10% rally in overall yield on commodity indices over the next six months and we prefer active commodity exposure,” UBS said. At the same time, he adds, “value” stocks, such as in the energy sector, tend to suffer less in an environment of rising interest rates and higher inflation than in “growth” sectors, such as technology, where valuations tend to be more dependent on future profits. Shares in the energy sector remain cheap, according to UBS.

Citi: Buy the dip

But the dip, or buy in stock dips, recommends Citigroup, noting that stocks are facing rising headwinds from higher bond yields, declining earnings per share and the geopolitical landscape, however, negative real interest rates remain support their returns, as cash and bonds remain less attractive options.

“We are tempted to buy into any stock dips, although if real bond yields turn positive they would make us more cautious,” Citi said, adding that it was overweight in the US and UK markets. Europe and Japan and underweight in Australia and Emerging Markets. In terms of industries, it is overweight in banking, health and IT, energy neutral, raw materials, industry and utilities and underweight in consumer goods and telecommunications services.

The monetary policy landscape is becoming less supportive for equities, Citi notes, with economists expecting the Fed to raise interest rates by 50 basis points in each of the next four sessions, with the benchmark interest rate likely to reach 3.0% by the end of this year and 3.75% by the end of 2023. This aggression represents a challenge for all financial assets. However, high inflation keeps real interest rates in negative territory and this tends to support stocks. Citi expects real US interest rates to move in positive territory in 2023, which will be a challenge for equities, but does not anticipate similar aggressive moves by other central banks in developed markets, although markets under QE are likely to decline. .

In terms of market direction, according to Citi estimates, the global index MSCI AC World and the pan-European index Stoxx 600 will record an increase of 7% by the end of the year, while at 3% profits are placed in S&P 500 and at 4% profits for the MSCI Emerging Markets Index.

The MSCI AC World Index is currently trading at an estimated 12-month EPS at 17×12, compared to the long-term average of 14x. The US market trades with EPS at 20x, well above the 16x average. Valuations in the United Kingdom (11x) and Emerging Markets (12x) seem less “stretched”, while the European market trades at 15x and Japan at 13x. Thus, in general, as Citi points out, stocks still have good value against their bonds, even in the US.

JP Morgan: Sees rally in the short term

JP Morgan estimates that despite the current uncertainty and turmoil, the chances of turning to a short-term rally of the shares due to the weak investment climate and the over-selling conditions, expect significant inflows into the shares.

Aggressive Fed debates that frighten investors, rampant commodity prices, the war in Ukraine, re-openings of economies and lockdowns in some parts of the world have led to a worsening investment climate and extremely low positions by investors. However, according to the American bank, both the market psychology and the investment positions are too bearish, and it sees a new rally in the shares soon. He notes that although it has recently reduced its record holdings slightly, it remains positive and maintains a constructive stance, believing that a short-term rally is possible, especially in parts of the small-cap and high-beta markets.

The earnings results of the first quarter of the listed companies are expected to be strong overall, also supporting the course of the markets in the next period. JP Morgan revised down its S&P 500 earnings per share estimate for 2022 from $ 5 to $ 230 (indicating another healthy ~ 10% year-on-year growth), given headwinds from rising production costs and the weak corporate climate.

At the same time, it remains overweight in the circular stocks traded close to the recent valuation lows against the defense stocks. With the market now pricing 250 basis points for an additional Fed rate hike by the end of the year, but inflation likely to subside and the bond position overweight, JP Morgan estimates that bond yields could fall. in the next period. In Europe, interest rate hikes of 75 bp are expected this year from the ECB.

On the energy front, he estimates that the increase in energy demand will exceed the increase in supply by ~ 20% by 2030 based on current trends, opening a gap that will require a significant additional capital of about 1.3 trillion. dollars to expand capacity and power supply. Russian oil flows were resilient until a few days ago, but the ban could push oil to $ 185 a barrel.

The expectations for the ATHEX

As far as the Athens Stock Exchange is concerned, although its autonomous upward trend has been interrupted and in fact somewhat violently in recent days due to the growing uncertainty internationally and the concerns around the energy front, preventing it from capitalizing on the very positive development of its upgrade Greece from S&P, analysts maintain their constructive stance based on the large comeback of banking shares which record impressive performance both compared to the domestic market and European banks.

After all, the signal given by Moody’s, which singled out Greek banks among all the others in Europe, is an important vote of confidence for their prospects. The house stressed that Greek banks along with Norwegian ones are the only ones that have positive prospects in the region of Europe, noting that it expects that the quality of loans will further improve as Greek banks continue to reduce NPEs, capital levels will stabilize, the Profitability will increase after significant losses in recent years and the financing structure and liquidity will remain healthy as deposits increase.

In a recent report, Citi stressed that it remains very constructive for the Greek banking industry and sees significant investment opportunities in any new issues of senior securities, while expecting an upgrade from the rating agencies. Although geopolitical / macroeconomic uncertainty will continue to plague Greek banks in the short term due to inflationary pressures from the war and their impact on households and growth, despite downward revisions in the macroeconomic outlook, growth in Greece remains is expected to be within the 3% -4% range in 2022, which will allow further derisking, but should also support organic capital production.

According to Nikos Kafkas, head of the analysis department at Depolas Investment Services, fluctuations in Europe and the US are expected to continue amid a plethora of first-quarter corporate results. Internally, the estimated price range for the General Index is placed in the range of 980-900 units, while significant support according to the analyst will be provided by dividend cuts in the near future.

It is a given that it is impossible not to influence the Greek market by foreign markets, stresses Elias Zacharakis of Fast Finance, nevertheless does not mean that he will follow them by foot. It can be more defensive and delayed in the falls and clearly more aggressive in the rises compared to the other stock exchanges. Already, both the market as a whole and the banking industry have a picture from other eras, surprising even the most optimistic. The outcome of the war in Ukraine will play an important role as an early end to it could halt significant problems, especially high inflationary pressures. On the other hand, in the next period, the investment boom will start to take shape from the new public investments through the programs of Europe. “Since the growth forecasts come true and we enter the investment stage, we see no reason not to see over-performance of the Greek Stock Exchange in the coming years,” concludes Mr. Zacharakis.