Three of our equity managers share their views on the recent market rotation, Q1 earnings and their outlook for European, global and healthcare equities going forward.
Gianmarco Mondani - Developed Europe Long / Short Equity
We have witnessed strong improvements in leading economic indicators so far this year, along with record breaking reporting seasons in Europe and indeed globally. However, inflation expectations have been building and significant support from central banks and governments increase the risk of a rise in long-term interest rates. This could lead to a less favourable environment for stock markets going forward, in our view. We believe it will therefore be paramount to select companies with strong earnings growth to counterbalance the negative impact on valuations from rising rates. We see opportunities within the technology sector, particularly in the field of semiconductors, where strong demand is likely to persist for years to come. The broad area of companies facilitating digitalisation also looks appealing to us. Similarly, we see value in companies exposed to the strong tailwinds caused by the European Union’s recovery fund and similar programs worldwide, particularly within construction and renewables. Conversely, companies with little or no earnings growth could struggle, particularly if balance sheets are stretched. Telecoms, utilities, real estate sectors along with some overhyped recovery sectors, such as airlines or hotels, could be vulnerable and provide opportunities on the short side.
Mark Hawtin - Global Equities
Following the recent pullback, we have taken advantage of the sharp move in valuations and are now approaching full investment within the portfolio, having previously raised cash to significant levels in the face of near-term risks. The majority of this has been deployed in areas where we continued to believe in the operational prospects for the companies, but where our disciplined approach to valuation had required us to exit. The recent move has allowed us to reinvest in some of those previously divested names. Where we see significant potential for the highest growth names, such as video streaming platforms, we have also added to existing positions. From a more general perspective, we remain constructive on the portfolio and the market, the latter having come off more than enough. Following the pullback, a number of our holdings have significant upsides versus our target prices and we have invested accordingly (arrived at via detailed and dispassionate discounted cash flow modelling).
Christophe Eggmann – Healthcare Equities
Q1 earnings highlighted continued weakness in drug sales and medical devices. The outlook provided by companies was not particularly encouraging either. Our basic assumption at the beginning of 2021 was that the whole situation would start to normalise in the second quarter. We now believe this has been pushed out to Q3 and the pace of recovery is likely to be slower than previously anticipated. The damage caused by lockdowns to patient access to healthcare is going to take more time to mend. According to an analysis of quarterly 13F filings by Goldman Sachs, mutual funds have significantly reduced their exposure to the healthcare sector to near 10-year lows. We interpret this as a great contrarian sign that provides an attractive opportunity to build exposure to the sector with the caveat that it may take a while and a slew of positive headlines to turn sentiment around. While we are cautious on firms whose cash runways have been compromised, we see opportunities related to those companies providing products and services in the life sciences space and areas of next gene sequencing and consumer genomics. Such market segments are key to realising the full potential of precision medicine. Meanwhile, the managed care sector tends to benefit from a steepening yield curve and has the potential to provide investors with some inflation protection.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.