[DORVAL AM] CAC 40: Is your portfolio ready for the second half?

[DORVAL AM] CAC 40: Is your portfolio ready for the second half?

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What can we expect from the flyer ball that is about to begin? The second half should be good for the first-quarter winners, including the luxury segment, which carries a heavy weight in the CAC 40 index. It is evaluated by Mathilde Guillemot Costes, principal – financial analyst, at Dorval Asset Management.

After an exceptional year in 2021 for CAC 40 performance (+31% of reinvested earnings) 25% higher than that before Covid (February 2020), the French benchmark is down 17% as of June 30, 2022 Investors and businesses must face Certain chaos on multiple fronts: geopolitical crisis, induced energy crisis, inflation, health crisis that is not quite over, climate issues, food crisis…

Traces too complex to analyze

At this point, the economic effects are too complex for investors to analyze. However, there is a strong split emerging between the stock markets, which anticipate a recession, and the comments/expectations of the company’s results, which remain generally positive, although more cautious of course. To be clear, earnings per share on the Euro Stoxx 50 Index are still expected to rise by 17% for 2021/22 and +5% for 2022/23 (Factset).

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The publication of the first half results will be an important meeting for analysts and investors to adjust their earnings forecasts. Remember that during recent recessions, Euro Stoxx 600 profits fell by 30% (Covid crisis 2020) and by 20% during the Eurozone crisis in 2011/2012.

In this uncertain environment, it is essential to listen to the macroeconomic environment as well as to companies to fully understand their strengths and specifics.

Flexible sectors

The pharmaceutical and telecom sectors will of course be more resilient in this environment, as will the energy sector driven by high oil prices. At CAC 40, Sanofi, Orange and TotalEnergies, which account for 18% of the index, should not disappoint. At current price levels, these three companies also offer solid returns of 3.7%, 7%, and 6%, respectively.

Companies that are exposed to North America will benefit from a stronger dollar, and companies with the ability to weather price increases will make the difference. This is the case for luxury stocks, whose valuations are becoming more and more “sense”. KHOLs – Kering, Hermès, L’Oréal and LVMH – represent 23% of the Parisian index. For the record, LVMH and L’Oréal have nearly a quarter of their sales in the United States. The second quarter growth for these two global leaders is expected to be around 12% with very good margin resistance despite the inflationary context.

dollar strength

In services, the prospects for Teleperformance and Dassault Systèmes remain very clear in terms of both organic growth and external growth.

In the aerospace and defense sector, aided by a stronger dollar this year, Airbus and Thales are still at the dawn of the reinvestment cycle and must contend with inflationary pressures and supply chain/employment constraints. Manufacturers face these challenges as well: Saint-Gobain, Legrand, Schneider Electric, ArcelorMittal, Michelin, Stellantis, Renault … Companies that are more cyclical by nature should offer volume prospects less favorable for the second half. However, the prices of these shares on the stock exchange have already fallen significantly …

Finally, the banking sector, which has been undervalued during years of low rates, was supposed to see a reassessment thanks to higher interest rates, but the specter of recession is now raising fears of higher provisions and lower results.

In short, about two-thirds of the CAC 40 should hold up relatively well in the face of the complex overall context, while the results of the last third, which are already down about 25-30% since the start of the year, could suffer more from a downgrade.

NB: The examples listed are based on analyzes for Dorval AM as of 11/07/2022. They do not constitute a commitment or warranty. The latter reserves the right to change its analyses. Like any investment, funds managed by Dorval Asset Management have the risk of losing capital and the amount of invested capital is not guaranteed.

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