For two weeks, global finance has not slept while waiting to see if SVB, Signature Bank, and Credit Suisse would be bailed out or left to sink. Some argue that the contagion risk is going to be limited to these names but others, like BlackRock, argue that this is just a sign of rumblings to come.
Macquarie’s Australian equity strategist Matthew Brooks tends to agree, arguing in a new research note that a soft landing is still too priced-in by investors.
“Markets will remain volatile as investors rotate from expectations of a soft landing to expectations of higher rates then to expectations of a US recession.”
In between, volatility across all asset classes is pretty much a guarantee. So which companies have what it takes to stomach the EPS downgrades and do well in times of increased volatility?
This piece will take a look at that very question.
The base case: Investors are (still) too optimistic
During a market contraction like the one that started last year, equity returns tend to be lower and more volatile. Risk appetite also tends to fall, and this is demonstrated by the outperformance of relatively defensive sectors and stocks, large caps over small caps, and rising credit spreads. This is true for both the US and Australia, with the ASX 100 far outperforming its Small Ordinaries counterpart.
As for credit spreads, Ron Temple of Lazard Asset Management noted that he likes to look at the difference in yields between US government treasuries and the Moody's Seasoned Baa Corporate Bond Yield. While we’re not at 2020 levels yet, that spread is widening and quite quickly as this next chart shows.
Which companies outperform in tough times?
The answer to this question is not that long in number. In fact, Macquarie’s data digging finds only seven companies regularly outperform the index on down days.
The companies are:
Amcor (ASX: AMC)
GrainCorp (ASX: GNC)
Orica (ASX: ORI)
Costa Group (ASX: CGC)
Ventia Services (ASX: VNT)
Nufarm (ASX: NUF)
Orora (ASX: ORA)
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