Claus Vorm, Portfolio Manager of Nordea’s Stable Equity Strategies, talks about how his team is taking on the 2024 market with confidence
Investors today may be looking back fondly on the decade following the global financial crisis, as unprecedented monetary stimulus and ultra-low interest rates powered one of the most fruitful periods in history for markets – particularly for growth-related equities.
However, this largely serene environment has since given way to elevated economic uncertainty and increasing market volatility. As we approach 2024, the primary challenge facing investors continues to be very sticky inflationary pressures, which are forcing many central banks to still aggressively hike interest rates way beyond initial market expectations.
With market nervousness persisting, investors are understandably uncertain of where to turn. Despite the ongoing challenges, if we look at markets through a fundamental lens, equities remain the asset class most likely to deliver a robust return able to offset inflation.
But risks in the market have clearly risen, so it is vital for equity investors to be increasingly selective. We believe the most successful companies in 2024 will be those with steady earnings and robust balance sheets, which can be stabilising forces against economic weakness and rising rates.
Stability has not been the most in-demand equity quality over most of the past decade, as investors gravitated towards stocks exhibiting outsized growth potential. But in this new investment paradigm, we have seen how markets have already begun rewarding stable companies.
A combination of qualities
Stable equities are typically less economically sensitive than the broader market, as these businesses produce products or offer services largely essential to everyday consumption. This universe is quite vast, from basic foods and personal care items, through to the provision of utilities and many IT goods and services.
While such companies largely enjoy consistent demand throughout an economic cycle, this characteristic alone is not enough. We believe it is vital to identify companies able to complement steady demand with pricing power. This is particularly important in an inflationary environment, such as the one we are currently witnessing, as companies with pricing power are naturally in a far better position to continue delivering earnings growth by passing on cost increases.
Then there is one final piece of the puzzle: valuation. Investors must keep a close eye on valuation – as a stable company is not automatically a stable share. Stable companies need to be trading on fundamentally attractive valuations, as the market environment in Q3 2023 has clearly displayed how much added volatility is associated with stocks at elevated prices.
Will 2024 see a rotation towards low risk, high quality and attractively valued stocks?
While we don’t have a crystal ball and we never try to outsmart the market, it should be the companies’ fundamentals that should guide us and provide insight on how to navigate markets at this very dynamic time. We believe equities can be an unparallel tool to navigate an environment where inflation is expected to be somehow higher compared to the past decade.
Having said that, we have an even higher conviction on low risk, high quality and attractively priced stocks that can deliver stable growth. These stocks trade, in some cases, at historically attractive relative valuations, have above market earnings growth and have not been significantly impacted in terms of earnings revisions. As a result, we believe they can add significant value to investors’ portfolios when, given their overall ability to offer lower capture ratios during market corrections, but still attractive upside when the market performs well.
A new dawn for equities
For the first time in almost 15 years, equity markets can no longer rely on the tailwinds of historically low interest rates and unprecedented monetary support.
If we are to encounter a period of elevated economic uncertainty and asset price turbulence, we are convinced the market will increasingly appreciate stable business models, due to their strong capital preservation characteristics. The stable stock universe is in a better position to withstand today’s historic inflationary pressures.
Nordea Asset Management (NAM, AuM 240bn EUR*), is part of the Nordea Group, the largest financial services group in the Nordic region (AuM 360bn EUR*). NAM offers European and global investors exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.
Nordea Asset Management has a presence in Bonn, Brussels, Copenhagen, Frankfurt, Helsinki, Lisbon, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Santiago de Chile, Singapore, Stockholm, Vienna and Zurich. Nordea's local presence goes hand in hand with the objective of being accessible and offering the best service to clients.
Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products. While most investors will still seek an exposure to equity markets, it is understandable if there is an increased desire to reduce risk.
Having entered the ESG space over 30 years ago, Responsible Investment is deeply rooted in our Nordic DNA. As an ESG pioneer and market leader we established an award-winning RI Team in 2009—now one of the largest in Europe. We currently offer a broad suite of RI solutions to investors of all types across the globe.
* Source: Nordea Investment Funds S.A., 30.09.2023
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