Mediolanum International Funds Limited (MIFL) is the management division of the Italian banking group Mediolanum. The Ireland-based company manages €51bn worth of assets, mostly through fund delegation contracts. Its head of market strategy, Brian O’Reilly (Dublin, Ireland, 1975), with previous experience in firms such as UBS or Goldman Sachs, is relatively optimistic about the situation in the financial markets.
Are we headed for a recession?
Recession is not inevitable, far from it. There is some data to hope that it does not occur. One of them is the amount of savings that Americans have accumulated after the Covid crisis. Before the pandemic they had a trillion dollars in deposits, and now they have four trillion. Also, that money is fairly spread out. This cash is helping to mitigate the effects of inflation. Our central scenario is that there will be no recession. And, if there is, it will be very soft. Today, most countries have full employment and company accounts are quite healthy.
How did we get here?
In 2020 we live the shortest recession that has ever been experienced. The central banks printed a lot of money to avoid the collapse. Later, the vaccines arrived, we cornered Covid-19 and the economies started to work again. But the situation was far from normal, and there was a knock-on effect on the economies. The reactivation caused bottlenecks, which ended up generating the inflation that we have today and for which the central banks have already begun to act.
Does the current situation resemble the oil crisis of the seventies?
Yes, definitely. The then president of the Federal Reserve, Paul Volcker, had to act forcefully to raise rates and try to contain prices. Now, on that occasion, prices rose at rates of 15%, hence the forcefulness. So the Fed triggered a recession. On this occasion, I think that the central bankers have learned and are modulating the message a lot so as not to damage the economy.
So have the markets overreacted?
Central banks are trying to cool down economies, and that is a very delicate exercise. Hence the volatility of the stock market. But I think that the current situation is very, very different from the one we experienced with the real estate crisis of 2008.
In the technology sector there have been excesses…
We saw some irrational exuberance in 2020, with companies like Peloton, Docusign, Netflix or Zoom doubling or tripling in value. We did not reach the bubble levels of the late nineties, but almost. We had kids in their rooms who thought they were the smartest by buying so-called meme stocks like GameStop. All those tech stocks, it’s not that they were bad companies, it’s just that they were very expensive.
Now there is a rationality in the prices of the stock market?
Yes. A few months ago the world stock market was trading at 22 times profit, well above its historical average. Whereas now he does it at 16x profit, which is below his average. So, not a bad entry point for a long-term investor.
Is it time to buy?
We are not recommending a strong entry into the stock market. We will have to see what happens in the next three months with inflation. If it moderates, we think the market is going to take off. But we are beginning to see very attractive investment opportunities in some parts of the market.
In what parts?
For example, according to our metrics, stocks with a value profile are still quite cheap. We know that inflation is going to remain high, that central banks are going to raise rates, but we believe that the valuations of the most cyclical companies, which we call value, continue to make no sense. And we think they can add a lot to portfolios this year. There is room for improvement.
In what kind of companies?
We believe that companies linked to the health sector are still cheap, and have good dividends. We also see opportunities in European banking, which will benefit from the rise in interest rates. We also continue to be interested in the energy and raw materials sector. Goldman Sachs keeps talking about the commodity supercycle continuing.
Where else are there opportunities?
In China. We have local managers there, and we see that the market is very cheap. There the Government has total power over the banking system, so that it increases or restricts credit. This year there will be elections in October, and we think there will be an expansion of credit. This is going to boost Chinese equities. In addition, the closures due to Covid are gradually being lifted. There are companies like Alibaba, with valuations of 11 or 12 times profit, really cheap. They already seemed so to us when they were quoted at 20 times. It has been greatly affected by the interference of the Government in several of the sectors where it operates.
Is the energy transition an investment opportunity?
Effectively. Now it seems that we are more concerned with energy security than with the transition. It is true that we will continue to have to consume oil, gas and coal for many years. But renewable energies will have more and more prominence and companies like Iberdrola, Siemens Gamesa or Vestas are going to play an important role in the next 15 years.
Is it time to return to fixed income?
It has been one of the worst starts to the year that has ever occurred. Now we are beginning to see some opportunities, such as the Italian sovereign debt, which is already paying 4%. We do not believe in the disintegration of the European Union. On the contrary, Europe is more interconnected than ever, and it has been seen in the response to Russia. In addition, there is less and less debt with negative returns. Now then, we are betting first on going back to sovereign debt and waiting a bit longer to enter corporate debt.