CLARESC'ALLOC

Claresco Finance – UCITS Management Committee – October 17, 2022

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A/ Macroeconomic analysis

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Over the past two weeks (Friday September 30 to Friday October 14), the equity markets have changed little (DJ600NR: +0.9%, S&P500NR: 0.0%) despite high volatility. While the markets are watching for signs of an economic slowdown which could influence the monetary policy of the central banks, the maintenance of inflationary pressures (Germany >10% with +7% forecast in 2023, consumer prices in the United States at +8, 2% and +6.6% excluding food and energy) and resistance in US employment figures disappointed expectations and caused high volatility on long rates (10-year US close to 4.0%, 10-year French close to 3.0%). English long-term rates once again suffered from fears of budgetary slippage, but the replacement on October 14 of the Minister of Finance by a more moderate personality clearly relieved the markets.

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Central scenario

Even if economic activity remains quite resilient in the short term (employment figures, company publications), many indicators raise fears of a sharp slowdown in the coming months (real estate projects in sharp decline, purchasing power penalized by persistent inflation). These fears are reinforced by the monetary tightening policy of the central banks which does not weaken, with the risk that the victory against inflation requires going through a phase of recession. We believe that the central banks (FED and ECB) should continue their rate hikes before possibly considering a more moderate policy towards the end of the year or the beginning of 2023.

After a semester of decline in valuation multiples, they should now be further supported by the moderation of long rates beyond the high volatility seen in recent weeks. Uncertainty now relates to the extent of the economic slowdown on corporate results. Moreover, the level of long-term rates remains linked to the evolution of medium-term inflation prospects: will we quickly return to inflation close to 2%, or tensions on the job market and the cost of the energy transition risk keeping inflation at around 3-4%?

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B/ Beliefs

Q3 results publications should prove relatively resilient on activity but be accompanied by growing uncertainty on the outlook with probable downward revisions to results to be expected for 2023. In this context, markets should remain volatile and subject to changes in long rates. We believe that the valuation multiples (11x NR 2023E in Europe, 15x NR 2023e in the United States) are low enough to absorb downward revisions to results, provided that the rise in long rates comes to an end. The economic slowdown should contribute to this, but the willingness of central banks to maintain a tightening of monetary policy as long as the inflationary threat remains risks maintaining pressure on long-term rates which is weakening the bond and equity markets.

We are cautious on stocks linked to raw materials, construction and consumer discretionary, and more constructive on stocks with the capacity to maintain their results or their growth in a context of economic slowdown. In Europe, the stoppage of Russian gas deliveries is an additional obstacle which should limit the potential of the equity markets despite the drop in valuation multiples.

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C/ Calendar

The main upcoming events that could affect the markets are:

• -   Impact of trends in inflation and employment on the monetary policy of central banks

• -   Impact of the economic slowdown on business performance

• -   Evolution of the situation in Ukraine (military, humanitarian, geopolitical...)