Edito August 2022

The stock market climate as people return to work in September contrasts with that of the past two months. This summer’s improvement ran into the statement from Jerome Powell, Governor of the Federal Reserve, who confirmed his intention to make “vigorous use” of interest rate rises as a weapon to tackle inflation. Whilst this statement had the merit of clarity, it reawakened nervousness amongst market operators and caution amongst investors.

Thus the Stoxx Europe 600 and S&P 500 indices fell by 5.3% and 4.2% respectively in August; over the past two months, European markets have put in a weaker performance (+2% against +4.5%) whilst the dollar has continued to rise against the euro (up 13% since the beginning of the year). In Europe, the publication of August inflation numbers (9.1% over a year) increased pressure on the European Central Bank to accelerate its own monetary tightening, particularly because this increase in inflation in Europe has been driven by substantial energy price rises and there is little to suggest that the surge in gas prices will end soon. In short, central banks are hitting the brakes on both sides of the Atlantic, although the recessionary effects will doubtless be more noticeable in the euro zone, which faces challenges in energy supply. If we add in the considerable impact on Chinese growth from uncertainties about the health position and the downturn in the real estate markets, the economic picture is far from untroubled.

As we discussed last month, the good news comes from companies, which are more adaptable than governments, and we would note that the majority of companies held in our portfolios have posted solid results and prospects. BNP Paribas – where an upward trend in interest rates is inherently favourable – announced 9% earnings growth from the already record levels of last year. Meanwhile, car maker Stellantis has reported a 17% increase in revenue with an unprecedented operating margin of 14%. In the defensive pharmaceuticals sector, Sanofi has announced that it has raised its earnings guidance for the year (predicting 15% growth in earnings per share).

Even if inflation were to become structurally embedded, we focus on companies that retain pricing power backed by lasting competitive advantages. For such stocks, periods of lower share prices create a market discount and represent entry points. Clartan Associés’ funds are managed from this approach of constantly seeking the best balance between the intrinsic quality of a company and the market appeal of its shares.