A pedestrian walks past a lot of certified used car sales in Alhambra, California on January 12, 2022.
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Although it will fall from its imminent peak, inflation is unlikely to normalize in the near future, according to Francesco Curto, head of research at asset management firm DWS. , head of research at asset management firm DWS, when he advises investors to look for companies with strong valuations.
US inflation at 7% in December On a yearly basis, according to new figures released Wednesday, printing is the highest since 1982. Meanwhile, consumer prices rose in the UK, Europe and elsewhere also hitting their highest levels in many. decades in recent months, prompting most central banks to begin guiding the market in the direction of tightening monetary policy, with the exception of the European Central Bank.
US Federal Reserve Chairman Jerome Powell speaks before a congressional hearing on Tuesday that rate hikes and a smaller balance sheet, what he described as “normalizing” policy, would be needed to rein in inflation.
Still, Curto told CNBC on Wednesday that the higher carbon and energy prices needed to hit governments’ emissions reduction targets would prevent the kind of “normalization” that would drag inflation back to targets. central bank spending.
He argues that lower prices will be essential to get consumers back to spending amid the pandemic, even if lifting Covid-era restrictions frees up more supply.
“People would be very upset if suddenly after the pandemic they start to see higher inflation eat into their spending power. That’s a clear risk from a sustainability perspective,” he said.
Much of the investment narrative over the past year has revolved around pivoting from highly regarded growth stocks, such as “Big Tech” (referring to companies like Apple and Alphabet), towards value stocks. The latter refers to companies that trade at a discount to their financial fundamentals, such as banking and energy, both of which do well into 2021 with interest rate expectations. higher.
However, various Big Tech sell-offs have been short-lived, including last week’s, raising questions about the expected inverse relationship between value and growth. Curto echoed other commentators, noting the distinction between speculative technology stocks and those with proven valuation capabilities.
“Over the past 12 months, we have seen significant negative price corrections for a number of speculative assets driven solely by fast money, by quantitative easing, and there are questions about this business will eventually provide some level of reality,” he added, adding that investors were right to be cautious about this segment of the market.
‘A more nuanced approach’ in 2022
The tech-heavy Nasdaq 100 suffered a steep sell-off in the first week of a new trading year, but has since rebounded as the growth-to-value swings appear to have tapered off in recent sessions. .
“I think the way to navigate an inflationary market is to look at companies with strong pricing power. It’s as simple as that,” argues Curto, noting that some value stocks lack determining power. this price, as evidenced by the UK’s various energy suppliers. out of business in 2021 due to higher energy prices.
“Some tech companies do have strong pricing power, it’s just that it’s unreasonable to price some of them. It’s absurd to believe that these companies will continue to grow forever. forever.”
Frankfurt-headquartered DWS, which has 880 billion euros ($1 trillion) in assets under management as of June 2021, looks for well-structured companies with high profitability and reasonable valuations. rather than trying to rotate by industry or subject, Curto explains. He recommends investors take a more “nuanced” approach into 2022 than buying stocks in line with an economic recovery.
“If you invest in this part of the market, you can weather inflation without any problems, because companies, thanks to their pricing power, will be able to pass on to consumers increase in input prices.”
This means that the full growth momentum may not necessarily be “exhausted”, as some of the key players in that basket of stocks, such as the US tech giants, still have power. Valuations are strong, Curto suggests, while the more speculative stocks that hold strong cash flows are likely to struggle.
In the area of market value, Curto noted that banks will likely benefit from higher inflation and interest rates, while some energy companies could benefit from capital spending cuts. that they will have to go through, as it will raise the underlying profits, providing governments do not raise taxes on them.
However, not everyone shares this opinion. In Wednesday’s research notes, both Goldman Sachs and BCA Research reiterated their fundamental assumptions about the continuation of the broad value growth cycle, with the following assumptions favoring the sectors and Threads often perform better in an environment of rising interest rates.
