After a furious start to 2023, the stock market has continued to perform well in recent weeks. Major US technology companies continued their upward trend, in some cases gaining more than 30 percent since the beginning of the year. The most recent reporting season provided additional support – company results for the first quarter of 2023 were significantly better than expected.
This is a pleasing development for GANÉ, as share price declines in 2022 were used to increase equity positions. However, it is now apparent that it has become more challenging to clear the bar for sensible equity investments. After all, interest rates are back – and any stock idea has to be measured against this alternative.
Many sectors, such as the construction industry, are facing a completely new reality as a result of the rise in interest rates. In some regions of Germany, new construction activity has plummeted by more than a third compared with the same period last year. Various banks, particularly in the USA, are suffering noticeably from the higher interest rates and the resulting losses in their bond portfolios. For weak companies, refinancing is becoming increasingly challenging. Higher default rates are inevitable.
As professional capital allocators, we continuously search for the most attractive risk-reward ratio in equities, bonds and cash. In the previous world of low interest rates, equities – in view of a negative yields of up to 30 percent of all outstanding government and corporate bonds worldwide – were virtually without alternative. This was followed by the first interest rate hikes by central banks, which initially presented the stock markets with only small sticks to jump over before investing in equities. In the meantime, however, interest rates have risen so sharply that they must be seen as a hurdle, since day-to-day cash deposits yield more than 3 percent in some cases and bonds are once again being considered by many investors as a real alternative to stocks.
For GANÉ, this makes the selection process even more important and the fundamental analysis of equities increasingly demanding. Each business model will have to be scrutinized even more closely to determine whether it is one of the future winners in the face of monetary, geopolitical and digital challenges, and whether the free cash flows that can be generated in the future justify an investment at the current valuation level. For the majority of the companies in our universe, we can still answer this question with yes.