October, the season of companies’ third quarter reports, was a good month for equities, with indices continuing to show strong gains for the year to date (around 20% for Europe).
The results announced proved relatively comforting for markets that were already fully valued and more demanding as a result. In contrast, even the smallest disappointment was severely punished. It is also worth noting that macroeconomic news has provided additional support in recent weeks: consumption figures for the USA were higher than expected, the French economy has regained its pre-Covid levels, and the ECB has taken a more emollient tone when it comes to future rate increases.
Returning to company publications, it appears that investors have focused on growth trends over the underlying prices of companies. This was reflected in the poor market reaction to IBM, despite it looking cheap, or the exuberance on Tesla, which is already prohibitively expensive.
For the Clartan funds, which are currently overweight in ‘value’ stocks due to the excessive valuations of ‘growth’ stocks, performances over the month were mixed. There was disappointment in figures from IBM, due to the drop in revenues at its Kyndryl infrastructure arm that it spun off in early November, and even more so in Worldline, whose press release triggered a 24% fall in the share price over the month. Conversely, the market welcomed figures from Kion (+17%), Page (+7%) and Randstad (+7%), three European companies with strong cyclical links and which reported organic growth or growing order books and raised their targets. Financials such as Scor (+16%), BNP Paribas (+4.4%) and Société Générale (+6%) also enjoyed a good month.
This phenomenon has clearly been exacerbated by the very low level of interest rates (slightly above 1.5% in the USA, still around 0% in Germany and France), which opens the way to very high valuation multiples for companies with strong visibility or growth. We believe that inflation concerns, which have been building for a number of months now, could attenuate these excesses in the near future, and we are wondering whether there will be a more deep-seated change in the hierarchy seen over the past decade if inflation slightly above central banks’ 2% targets establishes itself in a more structural way over the coming years. In any event, caution is required when it comes to bonds, which are now suffering from negative real yields, and “fair value” will remain a major focus in our management choices.