In 2022, the era of easy money came to an end with central banks raising rates to combat inflation. Neuberger Berman believes that a new economic regime has started, marked by higher rates and resurgent economic volatility. In a recent insight, the US-based asset manager discusses four major unfolding trends that could present attractive equity opportunities in the era after easy money.
Firstly, Neuberger Berman sees the shift to better earnings quality. “Over the last six decades, companies with lower operating margins tended to underperform their more profitable peers; likewise, companies that relied on more aggressive accounting techniques suffered relative to their conservative competitors,” writes Doug Kramer, Head of Institutional Equities & Multi-Asset Class, at Neuberger Berman. “We believe extra aggression is likely to earn extra punishment in both the current downturn and over the longer horizon.”
Second, the asset manager thinks that value stocks could benefit going forward. “Value stocks outpaced high-flyers for eight decades until easy money flipped the script. We believe higher domestic inflation and a potentially weakening U.S. dollar (now at historic highs) will likely usher in a period of global reflation which, in the past, has often benefitted value stocks,” opines Kramer.
Furthermore, Neuberger Berman believes that small caps are about to get a revival. The asset manager draws the parallel to the period before the 2008 financial crisis when small caps typically edged out large caps. Historical valuation differentials and dollar cycles were now pointing to small caps.
Lastly, the asset manager expects that non-U.S. developed markets could be set to outperform given the weakening dollar.
Overall, the article suggests that while the post-easy money era may present challenges for equity markets, there are still opportunities. “In our view, this calls for more thoughtful and selective portfolio positioning, which favours smaller stocks, is more regionally balanced, and pays more attention to both valuations and quality of earnings,” writes Kramer.
View the full insight here.
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