With a rebound in EPS growth expected for 2024, though with disparities between market segments, and with interest rates and inflation still at elevated levels, active management is key.
Global equity strategies focusing on the active selection of diversified value-creative companies with strong fundamentals and growth opportunities should thus prove effective. In fact, consistent long-term performance is better achieved with time in the market than by timing the market.
The outlook for global equities is constructive looking into 2024 with an earnings and growth recovery expected. However, disparities can be observed across sectors, market caps and regions, and business sentiment is still at weak levels, leading to some uncertainties. This is why a focus on active stock selection with a diversified portfolio of proven value-creative companies is key for global equity investors.
Companies “beating the fade” surprise the market by exhibiting a consistently positive spread between their CFROI® (Cash Flow Return on Investment. Source: Credit Suisse HOLT) and their cost of capital, i.e. by sustainably creating value. They typically have strong fundamentals and market positioning, namely solid balance sheets, low debt levels, pricing power, and good ESG practices, all of which support resilient earnings growth profiles. Furthermore, their balanced exposure to structural growth trends such as AI, healthcare or electrification helps sustain these high levels of value-creation.
Such companies tend to deliver consistent performances over a market cycle, especially in difficult macroeconomic conditions. In periods when inflation is averaging above 2%, they benefit from their high pricing power and their low debt burden. During volatile and recessionary periods, their defensive characteristics, including earnings visibility, are generally sought-after and rewarded by the market.
The high-inflation regime marked by the rapid pace of interest rate hikes that put exceptional pressure on highly valued companies at the beginning of 2022 is expected to come to an end. Although inflation and interest rates are set to remain higher than in the last decade, the tightening trajectory is expected to ease, making the outlook for high-CFROI® names particularly compelling, given their spectacular valuation reset in 2022 and their financial solidity.
Should 2024’s growth recovery expectations prove to be too optimistic, proven value-creative, quality companies exposed to structural growth trends are likely to provide better earnings visibility and operating resilience than the cyclical and unprofitable growth parts of the markets.
Looking at the long-term picture, the high-CFROI® approach applied in a diversified portfolio of leading names in value creation has proven to deliver consistent long-term performances that are not dependent on seasonality or market-timing capabilities.
