Growth stocks have undergone strong corrections. Monetary tightening is penalizing tech companies while the highly innovative security sector is suffering. A salutary correction? An entry point? A change of regime?

Alexandre Mouthon, member of the Pictet-Security investment team, provided his answers during a webcast last week.

As a reminder, Pictet-Security, launched in 2006, invests in security services and solutions for individuals, companies and governments. The investment universe is very diversified and covers 6 of the 10 MSCI sec- tors. The fund is divided into 3 segments: Security Services, IT Security products and Physical Security products. Weapons-related stocks are excluded from the investment universe. The fund has received the “Towards Sustainability” label.

Uncertain environment marked by inflation risks and the war in Ukraine

The last 18 months have been marked by the implementation of very accommodating policies to support economic activity. While these measures have prevented the worst from happening, they have led to an in- flationary situation for a large number of assets, raw materials and certain electronic components. For this reason, we decided from the beginning or 2021 onwards to reduce our exposure to high-multiple technolog- ical stocks. We also increased the weight of our physical security segment and certain industrial stocks in view of the reopening of the post-Covid economies.

This compression of multiples continued throughout 2021 and into 2022 mainly in the cybersecurity, fintech and software segments. This occurred in an economic environment that was favorable (i.e. before the outbreak of war). Companies were announcing a strong recovery in their activity and a sharp increase in order books. This strong recovery in demand post-pandemic led to a shortage of semiconductors, electronic components and certain raw materials. Inflation became an increasingly pressing issue and weighed on cor- porate earnings in the third and fourth quarters. Companies were expecting a return to normal from the sec- ond quarter of 2022. This was without taking into account the Ukraine crisis, which has had the effect of increasing inflationary pressure on raw materials exported by Russia and Ukraine (steel, palladium, neon, gas, oil, etc.).

While the return to equilibrium will depend on the duration of inflationary pressure and the ability of com- panies to increase their prices, the risk is that companies will publish very cautious first quarter results with downward revisions on profitability or growth for this year.

The direct exposure of the portfolio to Russia or Ukraine is very low (less than 1% in terms of sales expo- sure). Some companies had production sites in Ukraine as well, especially in the automotive field. Aptiv, for example, had 4 production sites in Ukraine before the crisis started. The company has relocated production to other European production sites. The impact should be very limited, the direct effects should remain very small. It is rather the indirect consequences, such as the increase in raw material prices, that could become a problem.

In our view, in scenarios of stalemate or de-escalation of the Ukraine crisis, global growth (with the excep- tion of Europe, which could fall into recession) should remain in a positive territory. The deceleration of in- flation and the return to normal of supply chains, which should have occurred in the second quarter, should take place in the second half of the year. This will imply revisions in profit margins.