La Française: Spotlight on equity markets

La Française: Spotlight on equity markets

26 oktober 2023

Private Equity Private Debt
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Since the end of August, all geographic regions have fallen by around -4.9% on average. During this consolidation, performance centred around seven US mega-caps (Apple, Amazon, Nvidia, Microsoft, Google, Meta and Tesla), which contributed 86% of the S&P500's annual performance. Without these seven stocks, the US index would have risen by a mere 1.9% in 2023.

The rise in US interest rates is affecting domestic stocks, with the Russell 2000 down 15.0% since the end of July. Investors are concerned that the sharp hike in interest rates will end up weighing on the financing of their growth. From a sectoral point of view, these fears also came to bear on the utilities (-10.0% since the end of August), real estate (-9.7%) and manufacturing (-7.7%) sectors.

Moreover, since the end of May, there has been a pronounced sector rotation, with value sectors clearly outperforming the rest of the market, with oil up 10.6% and financials up 3.9%. By contrast, the utilities and technology sectors were down by almost 10.0% over the same period.

In addition to this sector rotation, there are specific risks associated with a less buoyant economic climate, higher interest rates and poor management by certain managers. By way of example, Alstom, a sustainable mobility player, saw its share price fall by almost 40% following its cash flow warning. Alstom has been penalised by the new interest rate environment, which is impacting on new orders and therefore on its cash inflows.

In addition, ongoing tensions in supply chains have brought about a need to build up larger inventories, which has increased its need for working capital. As a result, its investment-grade rating by the rating agencies is at stake, given its level of profitability and debt.

In another example, the Danish company Orsted, which specialises in offshore wind energy, seems to have been too aggressive in its interest rate assumptions, tax credits and delivery times for certain equipment. At the end of August, the company announced that it would have to make substantial provisions, potentially amounting to DKK 16 billion, or 50% of its 2022 EBITDA, on three American projects. The share price has also plummeted by close to 40% over the last month and is continuing to fall at the beginning of October. 

After this initial phase of decline (-8.4% on the S&P500, -9.3% on the Eurostoxx), we remain cautious on its outlook. For the moment, we see no reason to be more optimistic. The risk premium on the equity market is also likely to rise, given the attack on Israel at the weekend and the consequences for certain commodities and an upturn in inflation.

The third-quarter earnings season should give us more indications of both demand and price dynamics, but the overall trend should be to remain prudent. Nevertheless, if the assumption of a soft landing for the US economy and inflation is confirmed next year, we would be more positive on US and European equities.

In conclusion, over the short term, we remain cautious on equity markets overall, mainly because of the highly volatile bond markets. However, positive seasonality, the forthcoming earnings season and weak positioning should help the asset class to weather the storm.

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