Sperb (Flossbach): “In uncertain times like the current ones, quality makes the difference”

Sperb (Flossbach): “In uncertain times like the current ones, quality makes the difference”

In uncertain times it is necessary to search for quality. This is the advice of Walter Sperb, country head Italy of Flossbach von Storch to navigate the pitfalls that, in his opinion, are hiding in the markets at the moment.

What is your analysis of the current state of the markets?

“By the end of 2023, major stock indexes had equaled and in some cases exceeded the highs achieved approximately two years earlier. This development was supported by a robust economy, falling bond yields and a particularly strong performance in the stock prices of the seven largest US technology companies. Stock markets are continuing their rally into the new year, and some investors may wonder whether this development is justified in light of rising valuation levels and persistent inflation. We do not make short-term predictions. However, in light of possible structural drivers of inflation such as demographics, deglobalisation and decarbonisation, a rapid return to central banks’ 2% inflation target is by no means a given. Other factors, such as geopolitical conflicts and ongoing wars around the world, as well as a major election year, not least in the United States, are uncertainties that investors may have to deal with.”

One-year performance of the S&P500 Index

So how to move in this context that is not easy to decipher?

“Many scenarios are possible. We feel well positioned in an uncertain world with a significantly diversified portfolio of quality company stocks. For us, quality is clearly defined: these are companies with attractive business models and strong market positions in end markets for which we see potential, meaning that these companies are highly likely to generate attractive earnings in the future. We look for these companies and calculate an enterprise value based on their future free cash flows, i.e. the share of profits that accrues to shareholders after all the necessary investments. We therefore want to participate in the success of companies in the long term, if possible. For ‘quality companies’ to be included in our portfolios, they must not only be successful in the short term, but also be robust and adaptable enough to ensure their success continues over the long term.”

How do you move from an operational point of view?

“As a matter of principle, we do not try to anticipate when the identified risks or opportunities will materialize to align the portfolio accordingly, because this can prove dangerous. At the end of 2022, the consensus was that interest rate hikes in Europe and the United States would lead to a recession, while China would support the global economy once restrictions imposed during the pandemic period were lifted. At the micro level, there were also strong doubts that the cultures of many technology companies, which matured almost exclusively in the ‘fat years’, would be able to transition to cost discipline. However, those who stayed on the sidelines out of caution or bet on China and against technology companies, missed out on an excellent year in the stock markets. Our approach to quality is not separated from the vision of the economic consensus of the market. Therefore, we always try to look at the near future with a pessimistic, often slightly paranoid, eye. To this end, it is important that the major risk factors of the portfolio are analyzed in the most diversified way possible and that inevitably general and regularly recurring factors, such as economic recession or rising interest rates, do not cause lasting damage. In addition to attractive future prospects, the resilience of companies in times of crisis is therefore an essential criterion for inclusion in the portfolio. The high resilience of all our investments and the broad diversification of the portfolio across key risk factors give us the confidence that we do not necessarily have to know what will happen in the short term to be able to benefit from the long-term return potential of the excellent companies in the our portfolio.”

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