Equity Strategy: Disinflationary phase to take hold - reiterate that bond yields are likely in the process of peaking out

Speaker: Mislav Matejka, Head of Global Equity Strategy.

 

In the past few weeks we have argued that bond yields have likely started the process of peaking. We believe that the disinflation phase has already begun, and that inflation prints, both the headline and core, will be meaningfully lower in 3-6 months’ time. Stylized, we see four stages to inflationary pressures: first the surge in commodity prices, then the spike in goods, followed by services prices, and finally the wages growth. Commodity prices have fallen back significantly over the summer, both metals, softs as well as energy, to be lower by 20-40%. The European natural gas price has almost fully reversed the summer gains, down 65% from the August highs – we have been calling that natural gas prices are set to fall back due to full storages, and that outages during winter are unlikely. At present it is goods prices inflation that is rolling over. Already the corporate pricing power indicator has come off nicely. Even though services prices are more sticky, we suspect that they too could be rolling over in the next months, which might leave wages growth without a catalyst to keep accelerating. Notably, corporate intentions to raise wages also appear to be peaking, and they lead wage growth. Separately, the COVID-driven dislocations continue easing, as seen in a big improvement in suppliers’ delivery times, bottlenecks in ports having fully cleared and the global freight/container rates that have reversed their spikes. Finally, as economic activity has weakened closer to contraction territory, bond yields are likely to be capped by subdued levels of growth from here. If the view of bond yields peaking gains traction, this would go a long way in helping the equity market to stabilize, with valuation multiples that would then appear more credible. In terms of market leadership, while for the past two years we championed the Value style, potentially peaking bond yields call for a tactical bottoming out in Growth style. We look for a rebound in Growth names such as ASML, ADYEN and SAP, and globally for parts of Tech to trade better, especially now that some of their earnings disappointments are out in the open.

 

This podcast was recorded on 31 October 2022.

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