Global macroeconomic fundamentals continue to deteriorate, with the prospect of developed markets edging closer to recession. The probability of a hard landing remains our base case. Central banks will end up pushing their respective economies into recession to re-anchor elevated inflation expectations.
At Jackson Hole, US Fed Chairman Powell’s hawkish comments weighed heavily on global equities as he emphasised the need for interest rate hikes to curb inflation over supporting economic growth. In Europe, inflation is being acutely felt, where the Russia-Ukraine conflict pushed gas prices to new highs, triggering a cost-of-living crisis along with an imminent recession.
Among large corporates, we are witnessing a slowdown in hiring, after months of labour shortages post pandemic. This trend is especially pronounced in technology companies, which aggressively recruited over the past few years. Companies are also looking to increase productivity, asking staff to do more, which could suppress wage inflation and reduce pricing pressure in general.
In the US, Q2 earnings were better than expected and hard data is still strong despite weakness in survey data. While we are still cautious on continued Fed rate hikes, a lot of these headwinds are reflected in current valuations.
In China, the equity market remained under pressure, amid the fallout from the country’s zero Covid policy of additional lockdowns. At the time of writing, investors await for more clarity from the 20th National Congress of the Chinese Communist Party, which opens on 16 October.
The technology sector has been the leading performer in the last decade. Yet despite a dramatic sell off, linked to style shift to value from growth and flight to cash generative companies from long duration, it has created some good buying opportunities, especially companies with high earnings growth.
Overall, the shift towards value from growth stocks since 2021 is set to continue, but future valuations will depend on whether markets experience a hard or soft landing, as well as the magnitude of the impact. We remain cautious on global equities, with investors favouring dividend strategies, increasing cash holdings, and shifting towards cash-generative sectors.
Marty Dropkin
Head of Equities, Asia Pacific
The Equities Outlook provides an overview of our investment team’s views and positioning in each of the key markets. Each of our portfolio managers has discretion over the positioning and holdings of their portfolios, and, as a result, there may at times be differences between strategies applied within a fund and the views shared in this document.
The full report is available on our website:
Equities Outlook September 2022: Global sentiment continues to erode (fidelity.be)
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