Investors should expect more of the same in the upcoming third quarter of 2022 as they have suffered through in the first half of the year, according to BlackRock.
Nigel Bolton, co-chief investment officer of BlackRock Fundamental Equities, made several predictions about which sectors will thrive and falter in the third quarter but warned that those hoping for a tech bounce may have more pain to come.
He said that the rapidly rising cost of living will have a detrimental effect on technology businesses as consumers reign in the amount they are willing to spend.
Already, companies such as Uber, Robinhood and Coinbase have announced cost-cutting measures to compensate for lower cash flows.
Likewise, the share price of streaming platform, Netflix, dropped 70.4% over the past six months as large swathes of viewers cancelled their subscriptions in order to limit their expenses.
This is the case for many consumer companies, with US retailers such as Walmart, Costco and Target reporting an excess of stock as customers go on budget.
Change in US consumer credit card spending
Source: BlackRock, Adobe Digital Price Index
Bolton said: “Higher rates make it harder to borrow or raise money to support loss-making operations, and there is now a sharper focus on cash generation.”
On the flip side, Bolton expects financials companies will benefit from higher interest rates because they’ll be able to increase their net interest income (NII).
He said that these businesses are in a unique position as their profit margins are likely to expand even if economic growth slows.
Even though financials are forecasting high returns as monetary tightening takes place, many bank stocks are trading below their historical average.
European bank valuations, 2005-2022
Source: BlackRock, Refinitiv DataStream
Additionally, he predicted that energy companies are likely to do well as they fill the 40% gap in European demand left from the severed natural gas supplies from Russia.
The transition towards clean energy and increased use of electric vehicles (EVs) is also likely to boost the need for businesses producing energy.
Industrials is another area that Bolton said is displaying a lot of investment opportunities, especially with the European Union’s €1trn (£858bn) ‘green deal’ and US’ $1trn (£820bn) infrastructure package giving the sector an institutional backing.
Despite the long-term potential from this area, many industrial stocks are selling at an attractively low price, according to Bolton.
One area of interest that he highlighted as an ongoing, long-term trend, is the supply chain hold ups that have driven global inflation over the past few years, which should push governments to invest more heavily in onshore production.
Shortages began when Covid initially struck in 2020 and supply chains are still struggling to catch up with demand, especially as China, the world’s biggest producer, continues to lockdown cities such as Shanghai in its ‘zero-Covid’ stance.
As a result, countries in the West are considering how they can move parts of their production line onshore in order to have more control over domestic supply chains.
Onshore related mentions in earnings calls
Source: Goldman Sachs
Semiconductors are a key asset that the West could increase their production of, according to.
They play a crucial role in manufacturing most electronic devices and demand has been high over recent years, yet nearly half of all chips are produced in Taiwan and South Korea.
The CHIPS of America Act was passed in the US last year, which aims to invest billions into achieving “semiconductor sovereignty”, according to Bolton.
He added: “We expect semiconductor equipment makers – providing the machines for the factories – to be beneficiaries of this long-run trend.”
High labour costs will continue to be a challenge as production moves westward – one of the main reasons that manufacturing moved to Asia in the first place is because it is cheaper to produce there.
However, automation may be a solution to the problem, with the number of industrial robots installed increasing 27% in 2021 to 486,700.
Robots were expensive to install when they first began to be used on a large scale, with only big companies able to invest in the automation of their factories, but alternatives have since arisen.
For example, cheaper robots that are programmed by staff to work alongside humans are used more frequently, and older, proven technologies are sold at a more affordable rate.
Massive delays throughout the pandemic meant “many companies realised they didn’t have total control over their supply chains” and highlighted the efficiency of automation, according to Bolton.