Company earnings have been remarkably resilient in the first half of 2023, but volatility is widening the gap between the winners and the losers, creating significant opportunities for investors.
This is the view of asset management firm BlackRock which released its equity outlook for the third quarter. BlackRock is the largest asset manager in the world, with $8.6 trillion in assets under management.
As economies slow, opportunities for active investors to capitalise on stock dispersion have been created. BlackRock says stock pickers should remain positive for two reasons.
- Recessions may be shallower than we saw after the Great Financial Crisis (GFC), with nominal growth – which does not adjust for inflation – above zero. This can be a supportive environment for equities.
- Slowing growth and sticky inflation will bring about greater dispersion between companies.
For the second half of 2023, they expect flatter returns as the impact of higher interest rates filters through to economies.
However, BlackRock said this does not mean investors cannot generate attractive returns, with the uncertain economic environment providing ample opportunities for investors.
It recommends a mix of quality, defensive stocks and underpriced cyclical stocks to diversify risk while having access to outsized returns.
Defensive stocks can provide consistent earnings during economic turbulence, as demonstrated in past recessions.
They have many “quality” characteristics, such as stable year-over-year earnings growth and pricing power. These characteristics are particularly important when companies aim to pass on rising costs during inflationary periods.
The key is to identify companies that can maintain strong earnings at a time when core inflation remains high and the costs of materials are coming down.
The healthcare sector is particularly interesting for BlackRock, as it has proven resilient to economic shocks and presents growth opportunities.
The sector has a history of stability and outperformance during recession and inflation. BlackRock believes diversifying across healthcare subsectors can provide resilience and growth opportunities in this uncertain market.
The best healthcare companies operate globally, which means that they are inherently geographically diversified and are not tied to the economic performance of a particular country or region.
Growth within the healthcare sector will come from pharmaceutical companies with products that tackle some of the world’s fastest-growing health problems, such as diabetes and Alzheimer’s.
They also see opportunities among biotech, such as companies that outsource biological drug manufacturing for smaller companies lacking necessary but expensive equipment.
In BlackRock’s view, the lingering effects of the COVID-19 pandemic create a business cycle that differs from historical examples. There are opportunities among stocks where fears of a deep recession have beaten down the valuations.
Another area presenting opportunities is the luxury sector, with companies selling premium, handmade products to high-income consumers who believe those products will hold their value and maintain healthy profit margins.
Any pullback in valuations on economic growth fears may present an attractive buying opportunity.
Industrial cyclical companies look for stocks with dominant market positions priced for a recession that they believe will trade strongly on positive economic news.