07 Feb 2023
We expect a high degree of volatility and uncertainty for equity markets in 2023, with the IMF now expecting one third of the global economy to be in recession. One of our concerns is that if central banks stubbornly dig in and persist with high interest rates and balance sheet reductions to squash inflation, it could result in demand destruction on a scale far greater than in previous cycles.
Meanwhile, expect an inflection point in earnings in the middle of 2023 amid a recessionary fallout on top line earnings growth, an inflationary hit on costs and higher borrowing rates resulting in greater interest expense. However, earnings expectations are diverging across different markets, providing investors the opportunity to capitalise on select opportunities.
Based on our latest full year 2023 forecasts, we are most positive versus consensus in Japan. Pent-up demand (post COVID-19) will underpin growth. Valuations are close to the global financial crisis (GFC) trough, resilient corporate balance sheets mean that exposure to the rising cost of debt globally is limited, and buybacks and dividends are set for record highs.
In China, the market is anticipating an economic rebound as COVID-19 restrictions abate and policy driven investment in certain sectors start to show through. Low valuations among Chinese equities represent an attractive entry point. However, an uptick in infections, triggered by the abrupt ending of pandemic restrictions, could cloud the economic outlook in the short run.
US stocks are relatively well positioned to withstand a hard landing with corporates well capitalised and consumers benefiting from elevated savings levels and a strong labour market. However, markets are some way off from pricing corporate earnings downgrades that would reflect a full-blown recession. It could leave us with the risk of a more dramatic drop in the S&P500 if growth suddenly slows.
Finally, European equities are the most exposed to the current polycrisis. The outlook remains uncertain and conventional wisdom suggests that corporate earnings could be the next to fall. However, much of this is already priced into markets, which often look six months in advance and can sometimes start to recover before earnings reach the bottom or the economy starts to recover.
Toby Gibb - Global Head, Investment Directing - Equities and Fixed Income
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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