With Inflation Rising, Asset Manager Eurizon Looks to Deep-value Stocks


Egon Hajdu

Asset management company Eurizon Hungary expects the pandemic, inflation, as well as the tight labor market, supply chain disruptions and tightening monetary policies, will continue to be the leading market drivers in 2022, chief investment officer Egon Hajdu says. In the equity markets, “quality” or “deep-value” shares may be the winners in 2022.

Inflation will be a critical factor this year: It determines central banks’ policy and has a significant impact on the real economy and capital markets, says Hajdu, who was talking at his company’s yearly preview press conference.

Despite significant upside risks to inflation, he sees global growth at slightly above the trend in 2022. Inflation may decrease a bit but will remain at relatively high levels. The pandemic is expected to ease and may turn into an endemic, which could alleviate supply chain problems in the second half of the year. Hajdu expects four interest rate hikes from the U.S. Federal Reserve and quantitative tightening at yearend.

2021 was all about inflation and COVID rather than normalization, Hajdu notes. Markets were driven by economic growth and increasing corporate profits. This year, Hajdu expects growth to continue, corporate earnings to grow further and overall monetary and fiscal policies to remain supportive, despite the tightening evidenced by the remaining negative real interest rate.

Labor markets and supply chains are expected to improve somewhat. Helicopter money, a monetary policy tool for printing large sums of money and distributing it to the public to spur economic growth, will disappear in 2022. Besides inflation, the main risks include the pandemic, geopolitical conflicts and energy prices.

Selective Approach to Stocks

“So, the headwind is strong for the capital markets and the stock markets as well, as the era of high-liquidity free money could be over this year,” Hajdu says. However, this turnaround does not imply a general stock market downturn; it only requires a different approach than before. “We don’t think that investors should abandon equity markets, only that now they need a more selective approach,” he explains.

“Fortunately for us, fundamentals may be in focus again in the case of stocks, which implies active asset management strategies,” says Hajdu. During the times of zero-interest money, passive asset management strategies that followed certain indexes worked well; investors didn’t care too much about fundamentals. This is about to change now. Eurizon applies active fund management strategies, the CIO notes.

During times of rising interest rates, earnings rather than valuation contribute to higher stock performance, Hajdu says. Although this is what happens now, he doesn’t see a major drop in valuations because real interest rates are still negative. In the current inflationary environment, cyclical sectors and value stocks perform well generally, while non-cyclical and growth stocks don’t.

“We have further narrowed value stocks into ‘deep-value’ or ‘quality’ stocks, which include the shares of the companies that can produce stable earnings amid the current economic challenges. These are companies that can provide good answers to the labor market competition, ESG requirements and the Biden administration’s measures to increase competition. We don’t rule out certain growth stocks with solid earnings and balance sheets and we are not afraid of tech stocks, either,” Hajdu explains.

Value stocks in general trade for less than what they are fundamentally worth. Deep value investing is buying stocks that are well below a conservative assessment of their net worth.

Tibor Komm

Hungarian Assets

Generally, the strengthening U.S. dollar does not benefit emerging equity markets, including Hungary. Conversely, the expected positive developments in EU markets can be beneficial.

The Hungarian equity market is not in good shape now as most of the macroeconomic indicators are worsening, including the current account deficit and the budget deficit. The macroeconomic environment is not expected to improve much until April. As a result, the Hungarian market is unlikely to outperform other regional markets, the CIO warns.

Hajdu sees further weakness in the bond market in terms of fixed-income assets. Bond and fixed-income funds will not receive inflows as long as real interest rates remain negative. There is a big question mark over the Hungarian forint, but he suspects it will remain at its current level.

New ESG fund

Eurizon has just launched a capital-protected derivative fund, the CIB ESG Capital-Protected Derivative Sub-Fund, chairman-CEO Tibor Komm says. The fund was designed to take into account environmental, social and corporate governance (ESG) considerations. Its capital accumulation period started on Jan. 17 and runs until March 18.

“With the increasing inflation, we have seen an easing of the crowding-out effect of the government’s ‘super bond.’ This could have a further positive effect on this segment,” Komm adds.

The assets under management of Eurizon Asset Management Hungary rose 10.5% to HUF 524 billion by the end of 2021, compared to December 2020. Assets managed in equity funds increased 48% to HUF 36.6 bln in 2021, mainly due to high yields. Eurizon remained the fourth biggest asset management company in the Hungarian market, although its market share dropped slightly.

Eurizon’s predecessor, CIB Investment Fund Management Rt., was set up in 1997 as a member of the CIB Group. Since 2013, the company has belonged to the Eurizon Capital group. Eurizon is the asset management unit of Italy’s Intesa Sanpaolo Group, of which CIB Bank Zrt. is also a member. In April 2021, the company changed its name to Eurizon.

This article was first published in the Budapest Business Journal print issue of February 11, 2022.

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