Equities – Feature
has been a near insurmountable headwind,” Ballard says. “This has resulted in low expectations for earnings growth combined with cheap equity market valuations.”
Great recovery Putting a more positive spin on the situation, some asset man- agers have sprinkled a little gold dust on the stock market out- look. JP Morgan has argued that stocks will end 2023 higher than they started, a point echoed by Goldman Sachs, which believes near-term share price falls will recover by the year end. Indeed, market moves have presented a different picture from the pessimistic view that seemed to prevail. January saw what appeared to be a recovery, with the US equity market rising by close to 5%, European equities up 9% and even emerging mar- kets climbing within touching distance of 6%, all offering a clear encouraging jump. Will Ballard puts these, and other events, into an investor’s per- spective. “The recent indications that the high levels of infla- tion experienced globally have started to soften, gives us cause for optimism,” he says. Such a reprieve, Ballard says, would give central bankers greater flexibility on monetary policy, moderating the pace of interest rate increases and perhaps with time, bringing them to an end. “This is supported by the latest IMF global growth fore- casts for the coming year, which show an improvement in their expectations for growth across almost all countries other than the UK,” he says.
An upbeat view
Looking at other factors that could be playing a positive role, Ballard notes the slow pace of growth expected for the global economy has, to some extent, already been factored into the markets’ expectations for corporate profitability. And with consensus expectations for earnings growth for global equities this year having already dropped to 3%, a signif- icant slowdown from 2022, while global equity valuations themselves are not excessive, being close to their 10-year aver- age, all provide a more positive picture.
All these together contribute to a more upbeat equity outlook, Ballard says. “This combination of reasonable valuations, rea- sonable expectations and some initial signs that inflation, global growth and monetary policy may not all be such persis- tent headwinds gives us cause for optimism when it comes to global equities.” Dan Mikulskis, a partner at consultancy Lane Clark & Peacock, is also upbeat. “Many 2023 macro outlook forecasts were quite pessimistic, seemingly everyone agreed a recession was coming. But markets have enjoyed a pretty spec- tacular start to the year up almost 10%, and data such as strong US jobs numbers and warmer European weather are throwing doubt on the recession story,” he says.
In equities, we believe recession isn’t fully reflected in corporate earnings expectations or valuations.
Carrie King, Blackrock
There are two key issues here though which create difficulties for investors. “One is the question of what is already priced. The market falls during 2022 priced in quite a lot of bad future news, so the news only needs to be a little better than the low expectations to generate a relief rally,” Mikulskis says.
Market loops
The second is the confusing feedback loops. “Sometimes mar- kets fall on news that suggests a strong economy – in anticipa- tion of interest rate rises – other times they rise on good news in sympathy with future economic strength,” Mikulskis says. This means investors should be extremely cautious trying to time entry into and exit out of equity markets. “Generally stock investors are rewarded well over the long term and it is a noto- riously tricky business trying to finesse the timing any more than that,” Mikulskis adds. Thankfully, as a broad rule, many investors – at least asset owners – admit they are sticking to it. There are other factors that could still have an impact on the equities picture in 2023 and beyond. Graham sums this up. “Much will depend on Harold Macmil- lan’s old friend, ‘events, dear boy, events’. Progress of the war in Ukraine will clearly impact the profitability of traditional energy companies while also attaching a premium to those companies that are key to delivering alternative forms of energy, potentially positively or negatively,” he says. Tomlinson concurs on the impact of a big event, which, from an equities’ perspective, could be a game changer. “If some- thing ugly happens this year, say a serious escalation of conflict in Europe, that is likely to lead to equities having a really tough time. At that point, we may need to add to our exposures.”
Issue 121| March 2023 | portfolio institutional | 45
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