Equity Strategy: Capex will be dependent on earnings delivery and on credit availability

Speaker: Mislav Matejka, Head of Global Equity Strategy

The main catalysts that we were looking for to drive an equity market recovery are being worked through. Entering Q4 of last year, we called for the peak in bond yields, China reopening to be the first next trade to position for, and finally for European gas prices to move lower as we enter winter, given ample supply. Our stance is that, in Q1, initially the market will keep moving higher, given good seasonals, light positioning and re-risking drive, but also that ultimately one should end up fading this upmove. Q1 will, in our view, likely mark a turning point, as the fundamental confirmation for the next leg higher might not come, and instead stocks could hit an air pocket of weaker earnings and activity as we move through Q2 and Q3. Beyond the still sharply decelerating money supply in the US and in Europe, inverted yield curve, no Fed pivot in sight and the continuing QT in the background, we believe that what was a very resilient corporate profits backdrop over the past two years will start to turn lower, as the pricing power reverses. What does that mean for capex? We see all three key drivers of capex deteriorating. Corporate earnings historically had a very strong leading correlation with capex plans. Second, Banks’ lending standards have been tightening of late, and the availability of credit has a clear relationship with capex spend. Finally, utilisation rates could weaken again as the year progresses, which also impacts capex. These three hold both for the US and for Europe. Capital Goods stocks have been the beneficiaries of the current rally, now back to price relative highs. They have never really had much of an earnings and topline reset, such as would be seen in past downturns. Their EBIT margins are at record highs, and their P/E relatives are also at record. We think Capital Goods will be one of the sectors that will start to face a more challenging backdrop as we move through the year, as the current rally that we were looking forward to peters out.

 

This podcast was recorded on 30 January 2023

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