Stock Market: “The fall of the CAC 40 also creates opportunities,” according to Christopher Dembek.

What are the factors affecting prices that have fallen sharply since the beginning of the year?

We live in a specific time. When crises usually follow one another, we are now witnessing an accumulation of crises: the war in Ukraine, the super-cycle of raw materials whose prices will remain permanently high, and the disruptions in international trade that will last until at least 2023, in short. Term, technical stagnation risk (two consecutive quarters of decline in GDP, editor’s note) in many countries, including France and the United Kingdom, as well as stagflationary risk for countries like Germany.

Additionally, lockdowns are expected to continue at least until the fall in China, as Beijing maintains a zero-Covid strategy. It now seems impossible to achieve the country’s target of 5.5% annual growth, with closed cities accounting for 30-40% of China’s GDP. As a result, global growth should be much weaker than expected this year.

Therefore, there is an accumulation of factors that affect prices. Certainly, the tightening of US monetary policy is the most important. The less accommodative policy of the central bank (Fed) leads to a withdrawal of liquidity and a myriad of consequences, including a higher dollar and lower capital expenditures (corporate investment spending, editor’s note).

Will the European Central Bank (ECB) follow in the Fed’s footsteps and create strong turmoil in the markets?

The European Central Bank will be much more stingy than the Federal Reserve, whose striking force is even greater and which has already planned to raise interest rates by 50 basis points in June and July. The US central bank analyzed early last year that inflation will certainly not be temporary. The European Central Bank is just beginning to realize this in Europe. There is a time difference.

Meanwhile, the Fed’s monetary tightening is affecting US markets, with which European markets are closely linked, prompting an immediate reaction.

Will inflation fall at the disposal of central banks?

We are in a state of inflation that will last several years. At Saxo, contrary to what Fed Chairman Jerome Powell has said, we don’t see peak inflation in most of the economies we’re watching. In recent months, much has been said about this peak and inflation has continued to rise.

It will continue, because we don’t have the means to reduce it sustainably and reduce demand sufficiently, especially on the other side of the Atlantic. If we want inflation to return to more sustainable levels in the US, we need key rates at 3-4%. We are not there at all! This means pushing the US economy into recession.

The same observation can be made in the eurozone. That is why we believe that inflation will continue at higher levels on the continent, without leading to hyperinflation.

Will oil prices also rise?

Like other raw materials, oil has entered a super cycle. However, there is an important peculiarity: higher prices are mainly related to chronic underinvestment in fossil fuel infrastructure, which dates back to before Covid and has worsened. This structural difficulty will not be resolved in the short term, as investments are not increasing, especially due to the energy transition.

US shale will not take over because producers are now relying on the logic of profitability, not growth. So they are not looking to flood the market with oil. And there will, of course, be the European embargo on Russia. The lower barrels will not be compensated by the other states, not in the next few months anyway.

In this difficult context, how do large companies cope?

Inflation spread across all sectors. This is a new and big topic, because no company in developed countries has a real ability to manage inflation. Several players are reviewing their first-quarter results downward, being cautious about the second quarter and determining that they have no vision for the third quarter and the end of the year.

While some hope for a recovery in the fourth quarter or in 2023, the forecasts given to the market have very little value at the moment, with many companies expecting to review their business model and investment plans after the summer.

Does CAC 40 still have a chance of finishing in the green competition this year?

Today, with the threat of a recession, it is hard to imagine the CAC 40 igniting. But we shouldn’t shy away from the stock market because of all that. We’re seeing a general drop in valuations, which leads to the creation of M&A projects, particularly in mid-tier companies. Looking at the longer term, the current discount provides buying opportunities. You just have to be more selective.

Coin tightening may affect small and medium hats in particular, but there are a few coins. For example, at the moment there are a lot of IPOs on the Paris Stock Exchange in the field of renewable energies (such as Lhyfe, whose shares can be subscribed since Monday, editor’s note). We can also mention the ongoing acquisition of the energy product Albioma by the KKR Fund. On the other hand, it is better to avoid small capitals, because the market is very volatile today.

Do you have any other advice for investors?

Investors often want to exit the market when it is down. The problem is that you then take your loss. The best logic is to arch your back. We know that stock markets run in cycles, so prices will start to rise again in the long run.

Diversification is difficult at the moment, in a somewhat panicked market where all sectors are affected. We should focus on the reduced values ​​in the undeniable areas of the future, for example regarding the energy transition. There is also the somewhat resorted sector of logistics, which benefits from the high costs of international trade, such as the Israeli company Zim or the Danish shipowner Maersk. Congestion is not ready to be resolved in light of satellite data from China.

After that, you can give preference to large thematic funds that position themselves in the main directions (artificial intelligence, well-being, etc.). They have the advantage of being well diversified among small, medium and large businesses. It is flexible and can adapt to changes in the market. Finally, funds that specialize in real estate – those invested in student housing for example – are of real interest insofar as rents are tied to inflation. They provide good protection against price hikes and are based on tangible assets.

Do you think that the legislative elections will have an impact on the courts?

never. Polls shouldn’t be wrong at this level. Emmanuel Macron is supposed to have a majority. On the other hand, there may be demonstrations after the summer on the topic of the cost of living.

If Jean-Luc Melenchon became prime minister, this would raise concern with the risk of expropriation. This is the worst that can be offered to liberal and capitalist investors. It would be a catastrophic scenario. But it is very unlikely.

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