Age of Disruption: Quintet Unveils Midyear Investment Outlook

On Tuesday 21 June 2022, Quintet Private Bank held a round table at the bank's European headquarters in Luxembourg-Ville, during which two of its investment experts presented the bank's midyear investment outlook for the global economy and financial markets, which was published that same day.

Ilario Attasi and Nicolas Sopel, Group Head of Investment Advisors and Senior Macro Strategist, respectively, at Quintet Private Bank, discussed this outlook and shared their views on the subject with members of the Luxembourg press (including Chronicle.lu) during this intimate gathering. More specificially, the investment experts presented Quintet Private Bank's five core convictions, covering companies, different sectors, the economy, energy and technology, as well as the main investment ideas linked to these opportunities.

In a world characterised by lower growth and higher inflation, fuelled by factors such as the war in Ukraine, ongoing supply chain disruptions and lingering COVID-19 risks, investors will continue to grapple with uncertainty. That includes downside risks such as a potential recession in the euro area, especially if the war in Ukraine escalates, and possibly excessive United States (US) Federal Reserve tightening, which would put the brakes on the world’s largest economy. Amid so much uncertainty, investors are understandably nervous about the outlook for corporate profitability and investment returns. 

Beyond many of today’s worrying headlines, however, lie significant long-term opportunities linked to this age of disruption. Both Russia’s invasion of Ukraine and the pandemic have spurred reshoring, leading to greater investment in the supply side of domestic economies. Energy insecurity is contributing to the green transition. And despite a rocky first half for technology stocks, themes such as cybersecurity, robotics and automation may go from strength to strength. 

Those were the views of Ilario Attasi and Nicolas Sopel. On Tuesday, the European wealth manager released its midyear Counterpoint, its forecast for the global economy, financial markets and key asset classes. In this report – reflecting expectations of worldwide growth of 3.3% in 2022 (down from 5.8% in 2021) and global inflation of 7.8% (up from 4.6% in 2021) – Quintet highlighted five core convictions, including their implications for investors. 

The firm has identified a range of structural micro and macro trends, which accelerated following the pandemic and Ukraine conflict, and will likely disrupt:

1. Companies – When the going gets tough: The best companies can thrive during periods of uncertainty, like today, including by planting the seeds for the next season of growth. That requires long-term focus and flexibility, especially financial flexibility. "For those reasons", explained Ilario Attasi, "we have a strong preference for companies with strong balance sheets and high levels of free cash flow. Financial strength gives quality growth companies the flexibility and opportunity to continue to invest through a downturn".

2. Sectors – Reshoring, restoring, reassuring: Governments and companies are taking active steps to address the frailties exposed by decades of offshoring and imbalanced economics. "This will spur significant investments across strategically important industries, leading to more robust supply chains, improved national security and greater energy independence", said Nicolas Sopel. "In emerging markets, China has long focused on rebalancing its economy, increasing its domestic focus and upgrading its manufacturing sector on the value chain". For Mr Sopel, these trends are likely to be important drivers of equity returns over the coming year. 

3. The economy – Learning to live with inflation: Global inflation is expected to reach 7.8% for the full year, then slow to roughly 5% in 2023. Even if that is still above levels during the pre-COVID-19 decade, which was characterised by fiscal austerity and balance-sheet repair, central banks should be able to slow the pace of tightening next year, following several rate increases this year. "Over the longer term, any inflation coming from the green transition and more local supply chains is unlikely to be met with significant rate rises", said Nicolas Sopel.

4. Energy – Renewable and reliable: Both fossil fuel and clean energy themes have outperformed the market since the invasion of Ukraine on 24 February 2022, a de-risking approach that makes sense in a context where markets are focused on the short-term need to secure energy supplies. Over the longer term, however, investors will increasingly focus on cleantech as enthusiasm for fossil fuels diminishes. "Clean energy equities have outperformed the market since the adoption of the Paris Climate Agreement in 2015", noted Ilario Attasi. "This decade, the divergence between clean energy equities and fossil fuel equities, which underperformed over the last decade, could be even more pronounced".

5. Technology – Powering through thick and thin: Global technology stocks may be on track for their largest annual decline in fourteen years, but long-term investors have good reason to continue to overweight technology-linked themes, especially through a diversified approach. "The world’s biggest challenges – climate change, energy dependence, pandemic risks, food security and supply chain resilience – can all potentially be addressed through technology", Nicolas Sopel said. "Meanwhile, some of the most exciting opportunities – the metaverse, artificial intelligence, autonomous vehicles and genomics – are also inextricably linked to technology. The long-term outlook for tech and innovation remains robust".

In relation to Luxembourg in particular, Ilario Attasi and Nicolas Sopel told Chronicle.lu that a lot of these Europe-wide trends would also benefit the Grand Duchy, which is home to the world's first green exchange. In fact, they predicted that the green bond share of finance would grow exponentially over the years. Electric vehicles are another area of potential for Luxembourg, which understands the need to achieve the green transition but may struggle to supply enough electric cars, for example, to its 600,000 residents. As such, a strong investment policy is needed. Further government subsidies are also required in order to encourage consumers to purchase such vehicles. They later added, however, that is was often better to invest in innovation or a certain sector rather than a specific stock, since technology is moving so quickly.

Quintet Private Bank's full Counterpoint 2022 Midyear Investment Outlook is available at: https://www.quintet.com/en-gb/counterpoint-2022-mid-year-investment-outlook?utm_medium=press&utm_source=referral&utm_campaign=mycp22&utm_term=3616