Ideas of the Day - July 11, 2022



Chart 1. European Health Care sector breaks-out of important levels (again)


This is the chart of the iShares Stoxx Europe600 Healthcare ETF (blue line) for the the last two years, now trading at 105€. During the last few days it closed above its 50-day moving average (green dotted line) and above its longer term 200-day moving average (brown dotted line). This is generally a positive development in an overall negative market. Last time this happened was in late March of this year and the stocks accelerated immediately to reach the high of 115€ in just a few weeks, before dropping again to the March lows. Three weeks ago, we emphasized that European Health Care is back at buying levels, when it found itself at the March lows. From a fundamental point view we like the sector, even after this small rally, as it provides protection in equity portfolios and potential upside, even in a case of a recession. We now expect the move higher to accelerate again in the coming days.



Chart 2. Time to buy a Louis Vuitton again (?)


Shares of Louis Vuitton's parent company, LVMH, have fallen about 20% from their record high of late 2021 (see blue line). And this is rational as the stock belongs to the sector of "Consumer Discretionary", which includes companies whose products are easier "cut-off" by consumers at times of recessions, in order to lower their household expenses. But not all companies in this sector are equal and not all companies offer the same characteristics. LVMH's products enjoy a supreme position among the affluent middle class and of course among the upper middle class and the rich, who are the last to feel the heat from a recession. Also it has a strong balance sheet and experienced management team to cruise the ship through rough weather. Trading at just 21x earnings (green line), close to the lowest level in 5 years, the current stock price could be offering a compelling entry point on a risk/reward basis for the next 1-2 years.


Chart 3. Have prices of Semiconductor companies fallen a lot ?


The blue line is the price evolution of the iShares Semiconductor ETF, which is now trading almost 35% lower than its peak in late 2021. From a "must-have" sector in 2020 and 2021, it has now become unloved and underinvested, primarily among the hedge-funds. From the promises of never-ending-sales-growth caused by huge demand for smart appliances, cars etc., it is now experiencing the hangover of overinvestment and high end-prices, which are beginning to hurt demand. Historically, semiconductor stocks have been very cyclical and follow closely the cycles of the economies, while the draw-downs during recessions are usually severe (30-50% from the peak). Having said that and being down 35% from the peak, it looks like most of the damage has been done in this cycle. The sector is trading at just 13x earnings, close to the lows of 2018. From current valuations, one would expect that the sector would perform in-line with the market, in the event of a correction. But the long term story of the ever increasing need for microchips in almost everything we buy is still valid. We are getting close to interesting entry points for the patient investor who would want to ride the next wave up. The sector's downside looks similar to the broad market's downside, making the risk/reward compelling again.


Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

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Sources of the charts: Factset S.A.