Equity Strategy: May Chartbook

Speaker: Mislav Matejka CFA, Head of Global Equity Strategy

Beneath the surface, the leadership is turning Defensive, and away from Value & Cyclicals… we think this rotation continues into/around last hike

In the past weeks, a range of Defensive sectors, such as Staples, Utilities and Healthcare, have rebounded. They joined the already robust performance of the Tech sector ytd. We are more positive on Tech this year than last, but think the sector is becoming stretched in absolute terms now, especially as good results are out in the open. On the other side, many Cyclical and Value plays are losing momentum, among others Mining, Autos, Retail, Construction and Semis, joining the weaker Banks run ytd. We think this rotation will continue as we approach the last Fed hike in the cycle, on the back of our view that US bond yields will be flat/down, and as the Q4&Q1 acceleration in PMIs, and in particular in European PMIs, starts to wane. The narrow and increasingly risk-off internal leadership adds to the main disconnect that the market will need to grapple with: hopes of a soft landing, without much pain to profits, labour or credit, but at the same time the consensus expectation that inflation will come down quickly and that central banks will be cutting in 2H. We believe that the consensus view that the worst of pressures is behind us will be proved wrong, as the impact of monetary tightening worked historically with a lag. Labour markets are lagging indicators, and could weaken abruptly – continued Q1 strength doesn’t mean anything for 2H. We held a view over the past two years that corporate earnings would be resilient, and argued that Q1 results would still be robust, but this is likely to start changing into 2H, as pricing power wanes.

This podcast was recorded on 30th April 2023.

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