Equity Strategy: February Chartbook

Speaker: Mislav Matejka, Head of Global Equity Strategy

Some of the equity market supports that we were highlighting in Q4 – peaking bond yields, China reopening, lower European gas prices – are not exhausted, but a lot has repriced. SX5E is up 30% off the lows, and MSCI China up 55%. We argued that supportive seasonals at the start of the year and light positioning would still be helping as we move through Q1, but positioning is quickly normalizing. Sentiment was very downbeat 6 months ago; now investors are more comfortable chasing the market, with a bounce back towards neutral in Bull-Bear indicator, stretched RSIs, rebound in HF betas and a fall in Put/Call ratios. Crucially, we think the fundamental confirmation for the next leg of the rally will end up lacking, consequently Q1 will likely mark a high-water mark for the market. The cushion of consumer excess savings has been eroded, and money supply in the US and Europe keeps contracting. We held a view over the past two years that corporate earnings would be resilient, but this might start changing. Profit margins are at a record, currently much higher than pre-COVID-19, and pricing power is likely to deteriorate from here. Q1 results are coming out mixed, to date, with a sharply reduced proportion of beats, and the typical upward revisions that one sees as we move through reporting season so far are missing. Apart from likely renewed deterioration in fundamentals in 2H, potential curveballs could come from US politics, among other, as the market is now becoming complacent given that VIX is near the low of the range, at only 18x. International markets continue to screen as much more interesting than the US: stay long Europe vs SPX, keep OW FTSE100 and keep OW MSCI China. We were bullish Value vs Growth style last year, but this year look for stalling in Value, especially if our October call for peaking US yields keeps tracking. Finally, use the remaining Q1 rally to cut beta of a portfolio.

This podcast was recorded on 05 February 2023.

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