Stocks fell last week as the Federal Reserve’s tightening plans weighed on company valuations.
We are growing increasingly concerned about the disconnect between stock valuations and surging interest rates.
While bond yields have increased at a rapid pace, with the US 10-year interest rate hitting 2.8% today, stocks have stayed resilient.
This is unusual. Fed hikes of 150 basis points in 1987, 300 basis points in 1994 and 200 basis points in 2018 all caused serious trouble for the markets.
We are also concerned about the economy. Inflation is surging while the GDP growth rate is slowing due to the war in Ukraine, COVID restrictions in Asia and a negative inventory cycle elsewhere.
As a result, the portfolio has been repositioned into stocks that have historically outperformed in stagflationary (low growth + high inflation) environments. These are stocks from the Real Estate ($XLRE), Healthcare ($XLV), and Energy ($XLE) sectors.
The repositioned portfolio should be resilient against surging inflation, for example if oil and food prices increase further.
If there is a sell-off in the next few months as a result of the higher interest rates, we may move the portfolio into riskier, cyclical stocks again.
$SIE.DE (Siemens Aktiengesellschaft), $BDEV.L (Barratt Developments), $ADEN.ZU (Adecco Group AG), $HOT.DE (HOCHTIEF AG) $VIE.PA (Veolia Environnement S.A.), $ICAD.PA (Icade SA), $SAN.PA (Sanofi) and $ML.PA (Compagnie Generale DES Etablissements Michelin SCA) were sold, to 1) reduce French exposure as a result of the risk of Marine Le Pen being elected; 2) to make room for stagflation beneficiaries in the Real Estate and Energy sectors.
They were replaced by $BP.L (BP), $STOR (Store Capital Corp.), $CAPC.L (Capital & Counties Properties PLC), $GRI.L (Grainger PLC), $SHEL (Shell PLS (ADR)), $LEG.DE (LEG Immobilien AG) and $HR (Healthcare Realty Trust Inc) .
𝗔𝗿𝘁𝗶𝗰𝗹𝗲 𝗼𝗳 𝘁𝗵𝗲 𝘄𝗲𝗲𝗸
“These are the stocks Pietari Laurila invests in now”
– This article in Finnish newspaper 𝐾𝑎𝑢𝑝𝑝𝑎𝑙𝑒ℎ𝑡𝑖 (paywall) summarises some of our recent investment views.
– “In the current environment, it is important to protect your capital from inflation,” notes the article. Value stocks, real estate and commodities are mentioned as assets that have historically provided high levels of inflation protection.