Julius Baer eyes defensive, quality growth for equities exposure

Despite expectations of challenging markets over the coming months, Julius Baer is preparing to tap emerging opportunities within the equities universe via an investment strategy focused on quality.

With growth scarcity back in the headlines, the bank is maintaining its call to focus on defensive industry leaders across various sectors.

This means defensive stocks in attractive markets and/or those that can grow by gaining market share. In line with this approach, Julius Baer has identified several areas where such companies can be found: casual dining, personal care, alcoholic beverages, food retail, healthcare, tower communications, and utilities.

At the same time, the bank is looking for quality growth companies that have attractive valuations, strong balance sheets, and high margins and cash flows.

These companies should do well in an environment of peaking inflation and lower bond yields, Julius Baer believes, adding that while quality growth stocks can be found across various sectors, they are over-proportionately represented in the IT and communications sectors.

“The additional credit tightening will likely impact economic activity down the road, making the case for defensive and quality growth stocks,” said Mathieu Racheter, the bank’s head of equity strategy research, in its mid-year 2023 market outlook.

Asia’s strong appeal
Geographically, Julius Baer sees the improving market backdrop in Asia as providing attractive opportunities for emerging market (EM) equities in the second half of the year.

Although the performance of this asset class has been relatively poor so far this year and investor sentiment remains risk averse, EM equities can potentially catch up and offer attractive entry opportunities in the next few months. A weaker US dollar, policy easing and China’s recovery should provide significant tailwinds, the bank believes.

For the time being, it is sticking to an overweight position on India and sees selective opportunities in China.

Further, Julius Baer sees value to be unlocked in Japan, where the quality and growth characteristics of certain domestic stocks provide an attractive diversification opportunity without the geopolitical turmoil.

Next generation potential
The bank’s outlook also highlights three themes where it believes equity investors should focus: artificial intelligence (AI), energy transition and shifting lifestyles.

In terms of AI, Julius Baer believes early beneficiaries of its ever-widening application will be software companies with proprietary data, the semiconductor value chain, and cloud infrastructure providers – where valuations are below historical averages and continue to offer compelling growth features.

When it comes to the energy transition, the bank’s focus is on the accelerating innovation, technological advancements and growth across the clean energy value chain, supporting earnings growth of those companies involved.

In addition, in the context of shifting lifestyle and demographics, Julius Baer expects resilient opportunities to emerge in areas like digital health, extended longevity and genomics.