Story of the month
INVESTMENT OPPORTUNITIES BEYOND AI
For a long time, the equity market environment was characterized by uncertainty and concerns about the future economic development. However, the danger of an imminent recession seemed to have been averted recently. Now that the equity markets have long been driven by structurally growing technology equities and the AI boom, investors are asking themselves whether the time has come for cyclical equities.
THE CYCLICAL INVESTMENT UNIVERSE IS FUNDAMENTALLY A BUMPY TERRAIN
Cyclical equities come from sectors whose performance is heavily dependent on the performance of the economy. At the end of a prolonged period of drought, the theory goes, investments in sectors such as banks, property or commodities should enable investors to position themselves for the next upturn. However, predicting macro cycles has proven difficult. If the recession, which has been cancelled for the time being, does occur after a delay, profit expectations of cyclical companies could turn out to be too optimistic. Especially if there are few structural growth drivers and there is fierce competitive pressure within the sector.
HOW TO REDUCE THE RISKS OF INVESTING IN CYCLICAL SECTORS
According to our analysis, however, an allocation to cyclical stocks can offer added value if a few aspects of risk management are considered. In terms of risk, it makes sense for the selected shares to have a low correlation to other portfolio components, such as the large technology shares. It is also advantageous if, in addition to the cyclical, rather short-term pattern, there is an overarching long-term growth trend in the sector. Cyclical lows are then generally well above the last lower turning point and boom phases lead to new highs in earnings and cash flows. Finally, within cyclical sectors, attention should be paid to company-specific “safety nets”, such as a healthy balance sheet structure
or a high proportion of recurring income, for example from maintenance and spare parts business. In our opinion, this turns a cyclical investment into a sensible long-term addition with manageable risk. And if the macroeconomic timing is right, all the better.
POTENTIAL MARKET AREAS WITH CATCH- UP POTENTIAL
In some areas of the market, there are signs of a positive combination of cyclical trough, structural growth, and healthy balance sheet structures. In more defensive areas of the chemicals sector, e.g., food chemistry, parts of the semiconductor market and industrial automation, investors’ expectations are likely to have bottomed out. In the case of laboratory equipment suppliers, both short-term and long-term trends should also point upwards.
