February Insight: Time to cut risk
We open with a strategy piece by Alastair George, who now questions whether 2023’s rally in global equities can be sustained. The global economy has proved more resilient than expected this year, leaving labour markets proportionately tighter. An extension of the period of above-target inflation is becoming increasingly likely, in both the United States and Europe. In terms of central bank policy rates, ‘Goldilocks’ may have already left the building as economies run too hot, even if this overheating may be due to unseasonably warm weather. We note that in recent weeks financial conditions have tightened as the US dollar has broken its downtrend, while long-term US government bond yields have been making new highs for the year. Global sector performance this year has been a near-perfect mirror image of the final months of 2022. We believe these wide swings in sector relative performance reflect investor positioning and sentiment rather than any fundamental change in the economic outlook in recent months. As such, they may be prone to reversal. Furthermore, geopolitical risks remain elevated. Even as the worst-case energy outcomes in Europe have been avoided this winter, peace in Ukraine seems a distant prospect. Russia’s administration continues to paint itself into a strategic corner. US/China relations, which had shown signs of thawing, seem to have re-frozen following the shooting down of a Chinese balloon over the United States earlier in February. Global consensus earnings estimates for 2023 have continued on a downtrend over the past month. It remains unclear in our view how global equities can continue their recent uptrend in the face of earnings downgrades, rising short-term interest rates and only low single-digit earnings growth for the year. We now lower our outlook on equities to neutral from positive as we have not seen the hoped-for stabilisation of earnings forecasts, even as the market has rallied. Any improving trend in the economic data has become a double-edged sword as prospects for even higher policy interest rates later in 2023 are firmly in focus.
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