Source: ODDO BHF AM
The question now seems to be no longer whether there will be a recession, but rather when and how it will materialize.
In this uncertain environment, our priority is to ensure that the companies we hold in our portfolios are financially strong enough to weather this period without difficulty. Once this has been achieved, as investors for whom valuation is central to the management process, our role is to assess what is reflected in current prices.
European value indices are now at levels equivalent to the lows reached in 2008 and 2011. What characterizes the current situation is that the decline in PE has been achieved at this stage only by a decline in the numerator, price, without a decline in the denominator, earnings. The explanation lies in the fact that companies have generally surprised positively at the last half-yearly publications, with managers also maintaining a confident discourse. Assuming that inflation, geopolitical tensions, the energy crisis and monetary policy tightening push the economy into recession, it is likely that earnings expectations, currently up 2% for 2023 after +18% expected for 2022, are overly optimistic.
For MSCI Europe Value, with the theoretical assumption of a return of the price/earnings to its historical average close to 11x, we note that the current valuation already incorporates a decline in earnings per share of more than 30%, a harsh scenario equivalent to that of 2020, when the global economy had come to a complete halt due to the health crisis and generalized lockdowns.
At the micro-economic level, there are many examples, and Saint-Gobain is a perfect example. Since the beginning of the year, the stock has suffered a sharp decline fueled by concerns about a possible slowdown in its end markets due to rising interest rates. An analysis of the current valuation level shows that it incorporates a slowdown in activity, a decline in margin and valuation ratios similar to those of 2009! This seems all the more excessive given that Saint-Gobain has transformed itself significantly since the financial crisis and has considerably strengthened its financial structure. The company is also a key player in the energy transition, providing essential solutions to reduce energy consumption and greenhouse gas emissions in buildings.
The analysis of historical data also shows that in crisis situations, the market low point systematically precedes the earnings revision lowpoint.
It is therefore important in these turbulent times to maintain a sense of perspective and to ensure that the portfolios we manage are composed of companies that are able to cope with the structural changes and challenges that are shaping the economy. This requires a move away from short-termism and away from sheep-like behavior.
Beyond the immediate risks on which some players prefer to focus, periods of high volatility are those that present the most opportunities for investors who know how to favor the long term.
