In this month’s strategy piece Alastair George believes that there has been a remarkable rally in global equities during the first few weeks of 2023. Cyclical sectors and markets have bounced back from the prior year’s malaise. This is in line with our thoughts that all that was required to engender a recovery in investors’ risk appetite was the absence of bad news. Fortuitously, the mild winter weather in Europe has led to rapidly falling energy prices in the region. The war in Ukraine is ongoing but economies are adapting by diversifying food and energy supplies. Inflation appears to have peaked in Europe and the United States. As a result, interest rates have remained well behaved, even as consumer sentiment and growth prospects improve. Over the past month, investors have had to reappraise China’s prospects. The abandonment of the zero-COVID policy is just one factor that is likely to result in a rebound in economic activity in China. A long period of regulatory intervention in the technology sector appears to have drawn to a close and press reports suggest China is shifting emphasis to resolving disputes with trading partners and away from unconditional ideological alliances. Nevertheless, we believe investors who have benefited from 2023’s ‘January effect’ should maintain discipline. Global equity markets had just touched their long-term average price/book multiple before the rally but any further gains in the short-term will once again leave valuations stretched. Earnings estimates will be key to sustaining market momentum. As markets have risen, global earnings forecasts have continued to fall broadly across sectors. In our view, for the rally to be sustained, earnings estimates will need to at least stabilise before the end of Q1. Risks remain, but in our view the recent rally is a logical consequence of the absence of bad news. We remain positive on equities, with a focus on regions and sectors where valuations remain close to long-term averages and expect earnings forecasts to stabilise as companies start to outperform overly conservative expectations. Provided long-term interest rates remain stable, there may even be an increase in the volume of merger and acquisition activity from the highly depressed levels of 2022.
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