Speaker: Mislav Matejka, Head of Global Equity Strategy.
SX5E rebounded 23% during Q4, to last Friday high. Out of the key supports for the equity market, we called in October for a peak in bond yields, as we believed that the disinflation phase had already likely begun. In addition, we argued in November that China reopening was the next trade and for Europe specifically we called for natural gas prices to fall despite entering winter, as supply is ...
Speaker: Mislav Matejka, Head of Global Equity Strategy.
SX5E rebounded 23% during Q4, to last Friday high. Out of the key supports for the equity market, we called in October for a peak in bond yields, as we believed that the disinflation phase had already likely begun. In addition, we argued in November that China reopening was the next trade and for Europe specifically we called for natural gas prices to fall despite entering winter, as supply is ample. Now, while some of the above highlighted supports for the equity market are not by any means exhausted, a lot has repriced, and the market focus could turn to earnings, which are likely to be weaker, and that could contribute to market consolidation ahead. The peak in inflation, which we believe is very helpful to stabilize P/E multiples, will in turn end up as a negative for corporate profits, especially as earnings benefitted from strong pricing and mix post COVID-19. In addition, the recent better activity prints might not hold. Real M1, our lead indicator, is pointing to more PMI softness. Also, the disinflation path might not be smooth, and US politics, as well as the Fed, could deliver curveballs. Put together, we think the current rally will end up faded as we move through Q1. We advise taking some profits, to tactically reduce equity exposure. Big picture, we looked for regional convergence over the past year, and encouragingly Europe is now outperforming the US in both the local and common FX. Stay with this. We also keep long commodity equities on peaking USD, China reopening and low inventories. We believe that one should start fading the last six months of a Cyclical rebound, and add back to some Defensives that lagged – such as to Utilities, Healthcare and Telecoms, as bond yields, PMIs and EPS revisions are all more likely to be lower, than higher, in 1H. While at some point in 2023 Cyclicals should enjoy sustained bottoming out in PMIs and in EPS revisions, their recent rally could end up looking premature.
This podcast was recorded on 09 January 2023.
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