Exposure rates of the Dorval Asset Management Range – 3rd June 2022

The plunge on Wall Street in April and May unleashed opportunities that could drive selective re-exposure to tech stocks. Meanwhile, the bond markets could stabilize in the US, although not just yet in Europe.

The fresh nosedive for US tech stocks in April and May this year, along with the correction from the start of the year, have now given the market a healthier profile. The Nasdaq 100 has shed more than 30% since its peak in November 2021, and even the cheapest stocks in terms of P/E have taken a severe tumble (cf. chart 1). In our international funds (Global Convictions range), we have therefore initiated investments on this market segment, although with a value slant. Tech stocks have not only fallen significantly, but they also boast the clear advantage of enjoying lower exposure than other sectors to the challenges raised by inflation, costs and the supply chain, which are still disrupting the world economy.

 

The drop for Tech stocks has also affected the cheapest stocks
Performances since the start of 2021

Nasdaq 100 Stock index / Basket of 29 stocks on the Nasdaq 100 with a value slant (last two quartiles in terms of P/E)

 

The US market as a whole could well keep on enjoying a relative stabilization in long-term rates at around 3%, given that some inflationary pressure indicators are moderating. The latest job report from May points to ongoing impetus for the US economy (+333,000 new jobs created in the private sector after +405,000 in April), but it also suggests a degree of wage moderation, with average hourly earnings up 0.3% in both May and April. The 3-month wage inflation trend has stabilized at slightly under 4% on an annualized basis, while the 6-month figure has eased back to 4.7% (cf. chart 2). 

 

US wages increasing at a slower clip over past few months
Hourly earnings growth in the private sector

Median over past 6 months / Median over past 12 months / Median over past 3 months

 

Conversely, May’s inflation stats in Europe reflect stronger and more widespread inflationary pressure (cf. chart 3). Christine Lagarde’s recently mentioned scenario of two 25bps rate hikes – one in July and one in September – already looks obsolete, while some members of the ECB are already calling for two 50bps hikes. In sum, not only are we hurtling towards the end of the road for negative rates in Europe, but interest rates are poised to become very positive fairly quickly to boot. Money-market rates could come to 1% – or even more – at the end of the year, and this has not yet been priced into European bonds. However, real rates – i.e. after inflation – would remain broadly negative and thus present no significant danger for the economy as a whole. The next ECB meeting will take place on June 9th.

 

Inflation heightening in the euro area
Inflation, yoy change

Consumer prices / Excluding food and energy

 

We have continued to resume our equity exposure in our flexible funds this week. Meanwhile in our international funds, we have introduced a basket of 29 US tech companies with a value slant based on a P/E criterion. As at June 3rd, this basket displayed a forward P/E multiple of 16.1x vs. 21.1x for the Nasdaq 100. We believe that a much lower P/E than the market will make our strategy more resilient in the event of a fresh sell-off on growth stocks. We maintain our bond duration at zero.

 

 

 

Download the weekly letter in PDF version: Exposure rates of the Dorval Asset Management Range – 27th May 2022

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