Schroders Portfolio Manager Frank Thormann: What Lies Ahead for Stock Markets after Recent Falls?
June 2022 – This is an expert commentary on the stock markets – What lies ahead for stock markets after recent falls? by Frank Thormann who is the Multi-Regional Equities Portfolio Manager at Schroders.
Schroders is a global active asset manager managing more than £574.4 billion (€641.7 billion / $785.1 billion 31/12/20) assets and managed locally by 42 investment teams worldwide. As a global active asset manager, the way we direct capital not only shapes the financial returns we achieve for our clients but also the impact that the companies in which we invest on their behalf might have on society.
What Lies Ahead for Stock Markets after Recent Falls?
Frank Thormann: Global shares have had a difficult few weeks and have fallen particular steeply since the US Federal Reserve (Fed) raised interest rates by 50 basis points (0.50%) on 4 May. For once, the US is performing worse than average, with its high weighting in technology and growth stocks counting against it.
As equity investors, one of our main sources of information about what’s going on comes in the form of quarterly reporting seasons. These see publicly-listed companies provide detailed explanations about what they’re seeing day-to-day; what is changing and what is not changing.
Latest earnings season positive, but clouds for some sectors
Frank Thormann: The reporting season for the first quarter has recently concluded. In fact, for the vast majority of companies, the business climate is still quite positive, showing strong revenue and earnings growth. It’s by no means been as robust as 2021, but for companies listed in the US S&P 500 stock market index, revenue and earnings have grown by a low teens percentage.
Looking ahead to the rest of the year, earnings estimates are not being revised higher but they’re also not falling dramatically. I’d say that’s a fairly strong achievement. However, there are some sectors that are more challenged and where clouds are gathering on the horizon.
One sector that saw earnings declines in Q1 was financials, particularly banks. This was largely because of a jump in provisions. Provisions are funds that are set aside in anticipation of future losses. We should remember that bank losses for bad loans have been low for a very extended period, so provisions have risen from what was probably an unsustainably low level. It’s possible that a lot of these provisions will be relatively short lived. The big question will be whether the US Fed can engineer a soft economic landing, or whether the economy will end up in recession. Clearly, if we end up in recession then banks could face a rise in bad debts.
Another sector that’s having a difficult time is manufacturing. Anything involving making physical goods and shipping them around the world is facing a very complex situation right now. There’s a lot of cost pressure in supply chains.
Providers of “mission critical” goods or services will fare best
Frank Thormann: That cost pressure, and the ability of companies to pass on cost increases to customers, is the key element that we as stockpickers are focused on right now. Those sorts of companies are able to weather the inflationary environment really well. In a nutshell, the source of “pricing power” – or the ability to raise prices without destroying demand – comes from having a product or service that is indispensable or mission critical.
Energy sector could surprise on spending restraint
Frank Thormann: A sector under great scrutiny right now is energy, given the rise in the oil price this year. We think oil prices are likely to remain relatively robust. Another positive surprise could come in the form of capital discipline, i.e. reining in spending. That’s a concept that been pretty foreign to the energy sector in the past. However, we’re now seeing companies refrain from increasing drilling activity at any price. Instead, they’re focusing on free cash flow generation, and on returning that cash to shareholders. That combination means energy remains a sector of interest for us.
This is an expert commentary on stock markets by Frank Thormann who is the Multi-Regional Equities Portfolio Manager at Schroders.
Important Information
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.
Schroder Investment Management (Hong Kong) Limited Level 33, Two Pacific Place, 88 Queensway, Hong Kong www.schroders.com.hk
About Schroders
As a global active asset manager, the way we direct capital not only shapes the financial returns we achieve for our clients but also the impact that the companies in which we invest on their behalf might have on society. The relationship between these two outcomes has rapidly evolved as we see a fundamental shift in how companies are viewed and valued. Understanding the impact that they can have on society and the planet is crucial in assessing their ability to deliver risk-adjusted profits.
Our ongoing success is built on a history of experience and expertise, whereby we partner with our clients to construct innovative products and solutions across our five business areas consisting of Private Assets & Alternatives, Solutions, Mutual Funds, Institutional and Wealth Management and invest in a wide range of assets and geographies. By combining our commitment to active management and focus on sustainability, our strategic capabilities are designed to deliver positive outcomes for our clients.
We are responsible for £574.4 billion (€641.7 billion/$785.1 billion 31/12/20) assets of our clients, managed locally by 42 investment teams worldwide. As a global business with over 5,500 talented staff across 35 locations, we are able to stay close to our clients and understand their needs. We have over 200 years of experience in investment and innovation.
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