SUMMARY
Global equities are now pricing in outright earnings contraction over the next year as odds of a recession rise; a more pessimistic outlook than our current estimates at Citi Global Wealth. We expect interest rates to peak in 2022 and this should eventually provide support for equities.
- Equity markets plunged into bear market territory on Monday (13 June, 2022) following a 1-2 punch of hawkish ECB rhetoric and a stronger-than-expected US CPI print late last week. Long duration Treasuries continue their price descent after a brief pause over the past few weeks, contributing to the ongoing reassessment of valuations in riskier assets. Up next is the Fed’s June meeting on Wednesday, where a 50-basis points hike was telegraphed, though markets are now pricing some chance of a 75-bps move.
- Amid rising gas prices and sticky inflation, consumer confidence as surveyed by the University of Michigan has fallen to its lowest level in decades. At the sector level, this portends a particularly challenging few quarters for retailers, as many of the group’s highest profile stores over-ordered household electronics, furniture and apparel in anticipation of much stronger demand than has actually materialized.
- Global risk assets were reminded of another central bank scared of inflation last week: the ECB. Meanwhile the yen has depreciated sharply as Japanese government bond yields pale in comparison to even European sovereigns. A weaker yen is not as bullish for local Japanese shares as it used to be, though the sharp selloff could be an opportunity for active managers to pick up higher quality Japanese names that sell to a global customer base. We remain underweight broader European and Japanese equities.
- Global equities are now pricing in outright earnings contraction over the next year as odds of a recession rise, a more pessimistic outlook than our estimates at Citi Global Wealth. However, valuations are also being pressured by rising bond yields. Our expectation for rates to peak this year should eventually provide support for equities, but we could see more near-term volatility as the market focuses on imminent Fed tightening risks.
- The bear market of the early 2000s is not a perfect comparison to today, but it does share some similarities with the current unwind of pandemic-related tech spending as well as a surge in energy prices following geopolitical conflict. During that bear market, dividend growers and defensives outperformed the broad market, and we take a similar strategy today as we grapple with acute near-term macro uncertainty.
