Equity Strategy: Growth-Policy tradeoff is poor into year end; Defensives to catch a bid

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

Compared to the start of the year, clearly investor expectations, market positioning and the equity valuations have moved up. Recession projections have been erased, there is no more fear, only complacency. While positioning was rather cautious at the turn of the year, many indicators point to significant investor involvement currently. SPX P/E has moved from 17x in January to 19x forward at present. Even ex Tech, multiples have rerated. Relative to this optimism, it is not clear to us that the Growth-Policy tradeoff has materially improved. China continues to disappoint, we believe one should keep fading any stimulus-induced bounces, and Europe has also lost momentum, especially since May, coinciding with our downgrade. On the inflation/policy front, it is likely easier for inflation to move down from say 10% to 5%, but the move from 5% to 2% becomes incrementally harder. Central banks could stay higher for longer, which would limit any prospect for multiple expansion, and the market would then need to solely rely on earnings growth for upside. On earnings, we note that full-year EPS projections are not inflecting meaningfully higher, current PMIs are consistent with continued earnings downgrades. European equity indices have struggled to deliver gains for a while now. SX5E is currently at the same levels it held in February, it didn’t advance for 6 months. Despite this, we do not see any upside from here into year end, and we reiterate our year-end targets that we first unveiled last December, of 4150 for SX5E. This offers only marginal downside from current levels, but we think there is a good chance that equity markets move meaningfully below our year-end projections in the interim. In terms of key positioning, we were OW Growth vs Value this year, but the Tech run is becoming heavy, so we think that pure Defensives look the best into year end, in addition to the Energy sector.

This podcast was recorded on 20 August 2023.

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