Equity Strategy: What was a supportive phase of Growth-Policy tradeoff ytd is likely to look quite different in 2H

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

The general perception is that investor bearishness is ubiquitous, but at the same time a potential downturn is not seen as happening anytime soon by the vast majority, and when it comes, it is expected to be rather mild, without much pain to profits, topline or credit. Most importantly, markets need to negotiate what is likely to be an increasingly challenging Growth-Policy tradeoff in 2H, a setup that could look very different to a near “Goldilocks" backdrop that investors got used to in the past 3 quarters. On the Growth side, after a meaningful improvement at the turn of the year, CESIs are down in US, Eurozone and China. After two years of us arguing profit margins will keep showing strength, margins appear to be finally peaking. Consumer and labour markets are resilient, so far, but that can change quickly. Historically, the time that passes from the best labour market prints in the cycle to the next downturn is surprisingly short. Certain labour indicators are softening, and consumer confidence is weakening again. On the Policy/Inflation side, the market is projecting a sharp Fed pivot in 2H, with nearly 70bp of rate cuts priced in by January. If these do not materialize, USD might bounce, strengthening USD is usually a risk-off indicator for markets. Of course, the Fed could stay hawkish for longer for the more problematic reasons, as well – i.e. sticky inflation. Inflation is seen to be on a down path by most, a view we agree with, but the wildcard is the inflation expectations and the wage growth. Notably, inflation expectations in the US consumer confidence survey have moved to 12 year highs. In a sense, the markets in 2H could be caught between a rock and a hard place. We reiterate UW Value style for this year, and low beta positioning, with overall market levels that could provide a better entry point in 2H.

This podcast was recorded on 22 May 2023.

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