Norman Villamin, UBP
Helped by notably strong second quarter earnings, global equity markets rose to new all-time highs in August, with some volatility mainly due to the potential impact of the Delta variant.
For example, the 2021 expected earnings growth rate for global equities rose to 45%, led by the Eurozone (+59%) and some emerging markets like Brazil (195%) and Russia (106%).
Yet while earnings estimates continue to be revised upwards in developed countries, deteriorating visibility over the economic outlook should focus investors on high-quality companies, according to UBP in a research report.
With GDP growth set to remain above trend, operating leverage will help companies to offset cost pressures. Companies should therefore be able to maintain margins at current levels for the foreseeable future.
“We maintain some level of asymmetry through structured products in Europe, providing some downside risk reduction in case of a correction in markets. Further earnings upgrades for the second half are likely, but they will be much more moderate, especially if activity disappoints in the coming weeks,” said Norman Villamin, chief investment officer of wealth management at UBP.
Quality counts
With this in mind, a focus on stocks with good earnings visibility is warranted, added Villamin.
Pharmaceutical companies, for instance, fit these criteria and currently trade at an attractive discount to global equities. Drug pricing reform in the US remains a risk, but UBP attaches a low probability to significant changes.
To mitigate this risk, meanwhile, companies with innovative products will retain pricing power and offer attractive risk or reward profiles. They also help complement UBP’s “big tech” exposure.
“While we stay overweight on equities, in addition to our convictions on long-term transformation growth themes such as technology and healthcare, we gradually tilted our portfolio more towards quality throughout the second quarter of the year. Companies with high quality earnings streams and greater visibility should outperform in a ‘mini-cycle’ environment,” Villamin explained.
Where UBP is more concerned, however, is around cost inflation and China growth.
Since March, the Geneva-based bank has been reducing its China exposure to neutral, both in equities and risky credit, having been disappointed with the balance struck between reform or restructuring and reflation and growth.
It sees rising regulatory and geopolitical risks as weighing on medium-term growth prospects, especially in those segments targeted by national reform or security efforts.
