22 Feb 2023
A tale of two markets
The opening sentence in Charles Dickens’ literary classic, A Tale of Two Cities, aptly sums up the clear disparity between the “Goldilocks” bulls and the “recessionary” bears as both camps try to navigate through a volatile and uncertain market.
Global equity markets strongly rebounded in January amid a Goldilocks-economic scenario of inflation easing, economic growth holding up and hopes of monetary policy turning dovish. The belief is that these underlying conditions will make corporate valuations compelling, prompting increasing exposure to equities.
Our view is that central banks are now at peak hawkishness and rate hikes will ease as large parts of the global economy head into a recession. For the Fed, rates were raised by 25 basis points to a target range of 4.5-4.75% at the February meeting, with Chairman Powell acknowledging that the economy’s disinflationary process had started. Further rate increases are expected but the hiking cycle may be easing with the terminal rate anticipated to hit 5.25-5.50% by H1 2023.
Inflation is a key factor - our annual analyst survey from more than 150 equity/credit analysts suggests that price pressures on businesses will peak by the end of Q1 2023. Falls in gas, oil, and other commodity prices have led consumer inflation lower in the past two months. Furthermore, while 60% of analysts believe their sectors are already in a slowdown, a shallow recession or worse, just over half of those analysts expect the business cycle will have turned positive again by year end 2023.
Meanwhile, China's reopening is being interpreted by many as a global tailwind, with its economy moving through an accelerated J-curve, amid the prospect even faster growth for the rest of Q1 2023. Three years of pent-up demand and high savings in the world’s second largest economy (post covid restrictions) point towards the potential for a boom in consumer spending in the months ahead.
For the “recessionary” bears, our baseline case is a cyclical recession in 2023. Equity markets may have priced in the end of interest rate hikes, but they are yet to fully reflect the potential hit to earnings from a faltering global economy. For companies, the near-term pain is evident in our survey’s wide range of data points. Our analysts expect a rise in debt defaults over the next 12 months. Around three-quarters say that, for now, the biggest focus for boards is holding down costs and shoring up revenues, rather than investing for growth or delivering shareholder returns.
Ilga Haubelt - Head of Equities, Europe
The Equities Outlook provides an overview of our investment team’s views and positioning in each of the key markets. Each of our portfolio managers has discretion over the positioning and holdings of their portfolios, and, as a result, there may at times be differences between strategies applied within a fund and the views shared in this document.
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