Profits of listed companies could grow by 10% in 2024 and this will certainly be good for stock prices. Verità&Affari spoke about it with Daniele Scilingoequity manager of Mirabaud AM.
What do you expect from 2024?
It is difficult to make predictions, especially regarding the future. This famous quote perfectly describes 2024, a year with many events as important as they are unpredictable. In our various scenarios we try to hypothesize developments that are underpriced by the markets, especially in the Swiss stock sector. Beyond all the highly discussed risks, 2024 could be the year of a massive Chinese fiscal stimulus and continued economic resilience of the United States, thanks to the investment program allocated by theInflation Reduction Act US, as well as a potential dynamism in European spending for the green transition. Finally, after many years of stagnant productivity, the combination of disruptive technologies, such as artificial intelligence, quantum computing and diagnostics, could lead to a new phase of acceleration of productivity. Despite the numerous known risks for 2024, we are confident that there will be many potential opportunities to take advantage of.
Specifically, regarding equities, what are your prospects?
The market’s focus is firmly on earnings resilience and growth expectations for 2024. Earnings estimates for 2023 have been overly pessimistic all year, including this past reporting season. Although 2023 “flat” earnings dynamics still appear relatively modestthe market expects 2024 to see an increase of around 10%, but we believe that expectations are too high and should follow a constant downward trajectory in the next months. However, a severe earnings downturn seems unlikely. Especially for Swiss companies, the appreciation of the franc will weigh heavily on sales growth and even more so on margins. We expect one reduction in consolidated turnover in francs by 5-6% caused by the weakness of the dollar and the euro.
Could this possible correction in earnings and earnings expectations result in a downtrend for stocks?
The first surprise in this sense could come from a limited impact on sentiment and market performance by downward earnings revisions. One reason could be greater sensitivity of market prospects interest rates in 2024. Perhaps surprisingly, we will find that long-term interest rates peaked in 2023 and will stabilize at lower levels over the next 12 months. During the months of November and December 2023, there was a small taste of the market’s sensitivity to a similar scenario, with stock markets rising sharply.
In light of the prospects you have outlined, what are the opportunities for equities in 2024?
We see significant opportunities in stocks that exhibit distinctive “compounding” qualities. In our investment approach, these companies combine a high return on invested capital, a defensible competitive advantage (moat in English), attractive growth prospects and intelligent management. Switzerland has always been a fertile soil for these compounders, thanks to the ideal ecosystem of a business-friendly policy, strong innovative power and global leaders in niche sectors. At current levels, valuations have compressed significantly, offering attractive potential entry points. It is worth remembering some names like Schindler, Straumann, VAT Group e Tecan, companies little known to the public, but which in their niche occupy a leading position in various industries, from dental implantology to components for semiconductor machinery. Without these products our quality of life would be at a much lower level. We expect that further opportunities derive from the separation of true growth stocks, which will be able to meet expectations, from pseudo-growth stocks, which sail at high valuations but will struggle to generate growth. We also expect the high interest rate environment to favor entrepreneurially managed companies, with particular attention to future returns regarding investments and expansion. We are very skeptical of companies that have made large investment projects or acquisitions based on unsustainably low financing rates. The day of reckoning will come refinancing date. Ultimately, the lack of visibility should increase volatility and lead to more frequent changes in sentiment. A disciplined approach with a compass pointing to reasonably priced compounders should guide us through potential storms and point us towards attractive investment opportunities.
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