In this month’s strategy piece Alastair George believes that the recovery from the March banking mini-crisis is welcome and will give comfort that the weakest links in the financial chain have been dealt with. That there has not been a cascade of collapsing institutions is a testament to the improvements in banking sector regulation since 2008. However, following the recovery in equity index levels during April, mere mid-single digit consensus earnings growth for global equities seems an insufficiently attractive foundation for a major rally. A consistent trend of earnings downgrades over the last 12 months even calls this modest level of growth into question. Equity valuations continue to trade at above-average levels in the US and at close to long-term averages in other regions. There appears to be no discount on offer for the risks of a slowdown or further geopolitical volatility. Further geopolitical volatility lies ahead as protagonists seek to establish credible negotiating positions, ahead of any talks and resolution. The outcomes of the expected Ukrainian counteroffensive remain uncertain, as does the shadow-boxing between the United States and China on the rules of the international order. This is a long-dated, uncertain dynamic, involving unravelling aspects of globalisation, and is likely to impinge on potential economic growth over time. At the start of 2023, an overtightening of monetary policy was probably the single largest risk for global markets. The recent banking mini-crisis crisis has conveniently re-set policy rate expectations onto a lower trajectory. Money supply and loan survey data suggest that credit growth has slowed considerably during Q1, which should leave US interest rates on a declining trend. We believe the pain for long-term government bond holders may be over, and in an environment where estimates continue to be at risk of downgrades, we prefer defensive equities such as utilities, telecoms, pharmaceuticals, defence and selected real estate. The food sector is also set to benefit from declining input cost pressures. We maintain a neutral outlook on both global equities and global bonds. Global equity valuations slightly above their long-term averages offer little directional guidance at a time of cyclically low earnings growth.
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