Four sectors to make the most of the current economic and stock market cycle

If the last year and a half has been marked by anything since the start of the pandemic, it is because of the absolute success that monetary stimuli have meant – in terms of GDP, the world’s five major central banks have tripled their balance sheets – and fiscal, with an injection of 10 billion dollars which left to nothing the “first exercise” of QE which took place in 2008. A few months during which pandemic and vaccines were the protagonists. Something that will continue but with the focus elsewhere: if developed countries are torn between an additional booster dose, vaccination in emerging countries still remains a challenge “which makes us think that vaccination will progress more slowly and it seems difficult to envisage a global vaccination by next springSays Joan Bonet, Director of Market Strategy at Banca March.

At the economic level, says this expert, the cycle is entering a much more mature phase with uneven growth depending on the region. But are we facing the end of the cycle? If we look at history, we see that the duration is generally much longer than what we have accumulated with an average, since the 1950s, of 5 years. And if you zoom in on the last 30 years, the average cycle length is 8 years. “It doesn’t guarantee anything, but it helps us avoid the dizziness one might have with such rapid recovery rates and can help us think about how many more might continue to grow.” Growth that will come from private consumption.

We are currently in an expansion phase, where growth is more moderate, markets more volatile and eventually results in a rise in interest rates, which for the moment seems far. In the opinion of the entity, The United States will increase by 5.9% this year, China will increase by 7.9% to reduce its growth to 5.6% in 2022 and in Spain “growth will be postponed to the next few years”.

An economy that has factors in its favor to continue to grow, such as the tourism sector – which has recovered but has not yet reached pre-pandemic levels – unemployment, which has returned to levels of before the crisis but has one of the great challenges of the energy sector. “Not only at global or European level but also at the Spanish level where 75% of the energy is received from abroad and where the cost of electricity on disposable income is slightly higher than 8%, above European countries ”.

A challenge that joins another of the great risks that Banca Marcha sees: inflation. “Inflation will be temporary, but that doesn’t mean short. If we look at the United States, which is the most anticipated economy, we see that the price growth path will be slower. For the United States, we expect the current levels of 5.3% to end the year at 4.5% to drop to 2.2% at the end of June 2022. However, the European curve increases as the basis of comparison is less good and we are still waiting for the positive. surprise upside down. We will return to 2.8% towards the end of the year and below 2% in June 2022 ”. A figure that central banks will continue to monitor, which have already anticipated a drop in monthly bond purchases. The markets anticipate that the Fed will raise rates at the end of 2022 while for Europe “futures discount that there will be no rate hike until December 2023 with rates around 0% at least until 2025 “.

With this scenario, where are the opportunities? Government bonds and long-term strategies are not an alternative at the moment. Banca March believes that unlisted fixed income securities “have higher yields with lower default rates than high yield bonds and with higher recovery rates. In exchange for less cash, we can have more profitability. In addition, the debts of these assets are fixed at a variable rate, which avoids the question of duration ”.

Regarding equities, Bonet admits that investors “have been spoiled. In the past 11 months, the US stock market had not fallen 5% from high to low and this was something atypical that we had not seen since the 90s. The last cycles have been much longer and the return has been 4 to 5 times greater”. We are entering a phase which is natural. “When cycles shift from recovery to expansion and volatility increases, there are usually declines of more than 5%.”

In this phase of expansion, where interest rates will eventually rise, banks are doing better. Plus, says Bonet, it’s good to have less cyclicality. “Before the summer, we observed that consumer discretionary companies, linked to economic openness and travel, had done very well and we think they have already done too well, so a good way to reduce the beta is to reduce consumer discretionary in favor of the health sector. ”.

Moreover, when we talk about issues in supply chains like the ones we have now “it is good to find companies with the ability to set prices. And finally, it’s good to navigate the cycle by punctuating but we must commit to two ideas that will have long-term growth: technology, which is still among the most profitable sectors while the cycle is recovering. (to be avoided when it is in recession) and on the other hand. secondary issues related to the green transition.

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