The recent earnings season represented a resilient start to the year, with revisions largely remaining positive. While expectations had previously been lowered by downgraded analyst expectations, this is nevertheless a positive foundation and sets an upbeat tone for the rest of 2023. Indeed, earnings in Europe are proving to be very resilient, with both revisions and 12-month forward earnings trends performing better than the US. While a shallow European recession may appear in H2, a deeper corporate recession across FY 2023 is now unlikely.
The trend this year is thus one towards normalization after a disruptive and distortive 2022. Natural gas and power prices have normalized, and supply chain issues have begun to ease with many corporates now converting order backlogs into sales and profits. While some cyclical concerns do remain, the parts of the investment universe that follow these patterns have delivered convincing performances; chemicals, industrials and automotive all posted strong results, while parts of the consumer sector have been standouts with extremely strong demand for luxury goods couple with price increases – rather than volume growth – across other subsectors.
Looking beyond the recent impressive earnings season, we see structural opportunities emerging across several sectors. Industrials in particular stands out, as it increasingly sees the benefit of supply chain problems beginning to ease – order backlogs are still high in some areas, but lead times are normalizing so we expect decent growth in 2023 and an improving outlook for 2024. Indeed, while there will certainly be some short-term destocking, in the medium to longer term the key players will benefit from a range of trends. For instance, software solutions represent a strong growth area for some, with recurring revenues that are naturally adjacent to the growth in automation products. One example here that should be of interest to investors is PLM – product lifecycle management – software that enables the development and manufacture of products based on digital twins, shortening the time to market for innovative products. Indeed, cloud-based PLM software will allow a broader base of clients to benefit from these opportunities.
Other beneficial trends include decarbonization – where we see good growth in solutions that permit the more efficient use of resources – and the move to on/nearshoring where the need for automation becomes an even greater imperative due to higher costs – and indeed scarcity – of labour. So, while we undoubtedly see strong structural tailwinds, the question is whether these are sufficient to compensate for any cyclical weaknesses we are likely to see in the coming months? We believe that, in many cases, they are, as evidence by recent guidance upgrades for several big players across the industrial and semiconductor sectors. However, risks, of course, remain. In this respect, interest rate uncertainty looms large, and may cause concerns in some sectors – such as real estate stocks with significant leverage – if rates remain elevated for longer than expected.
Earnings in Q1 certainly exceeded expectations and a severe recession has likely been avoided, yet weak growth endures and uncertainty remains around both the war in Ukraine and the resilience of some US regional banks – overall sentiment is thus optimistic but certainly not, yet, euphoric. However, there remain several sectors and subsectors that should be of interest to equities investors in the coming months. The service sector is showing good levels of activity, while consumer goods – especially luxury goods – have recently performed very well and look promising for the coming months.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication's sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies:
Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).
Disruption – opportunities in change
Read how disruption is creating opportunities through change, for both corporates and investors, across a range of industries and sectors.
Growing pains? China’s property sector challenges signal an economy in transition
China’s property sector is a significant engine of the country’s economy, and uncertainty around the outlook is weighing heavily on market sentiment. But we view these challenges as growing pains in the shift of China’s economy to a more consumption-led model. What are the opportunities of this transition?