When Alphinity knows global earnings will turn

The winds of 2022 still blow strong, but there are signs they're turning.
David Thornton

Livewire Markets

2022 will be remembered as the year it all came undone. The year when the cheques from COVID stimulus and accommodative monetary policy began to bounce. 

The punishment was inflation, rate hikes, and downgrades - in that order.

Make no doubt about it, we are still in a downgrade cycle and likely will be for some time. But there's a wind change afoot. 

So what exactly has changed from a year ago, and what how does the roadmap through 2023 look? For starters, defensives may have run their race while growth stocks may be creeping back into view. 

These are a couple of the insights provided in this wire by Jonas Palmqvist, a Portfolio Manager at Alphinity Investment Management.

He also provides a state of play (and outlook) for earnings, the balance of risks currently in the market, and the sector stand to benefit most from China's reopening.

Note: This interview took place on February 21, 2023. 

Edited Transcript

How has the market changed from a year ago, and how has your positioning changed?

I think one thing that's really important to acknowledge is that we are much deeper into quite a negative cycle. Economic growth is slower, earnings have come down. And I think looking at what we were busy doing in 2022 and a year ago in the portfolio was selling out of some of these growth champions. They were the big tech names, for example. They were heading into some real earnings headwinds, that was an issue. We were also busy selling out of the remainder of the cyclical recovery stocks that we had owned because of the reopening after lockdowns. And the money went to defensives. And I think it's safe to say now, 3, 6, 9, 12 months later, that there is a bit of a reversal going on because we are much deeper into this negative cycle. The defensives are well discovered and we are trying to pick the ice out of the growth and even sometimes the cyclical side of the market again.

What is your fundamental analysis telling us about the macro picture?

The macro has been a big issue last year and it was the uncertainty around the macro. So economic growth was slowing down big time. Earnings expectations have been coming down for quite some time. And then we had these big three pieces that really set the scene for the market. And number one was Russia-Ukraine war. And unfortunately we still have that with us and in the market. But the second one, that uncertainty around China and how they handled COVID and the economic slowdown, that has changed. They have committed to a reopening and that's a big positive for markets that we carry into 2023. And the third one, a big, big factor obviously is the Fed tightening. They are now one year into monetary tightening, raising rates. They're not done yet, but they're definitely getting closer to the end if you judge from just where the inflation is heading in the US.

So if you add up all the macro factors in the world today, you still have headwinds, risks, uncertainty. But compared to 2022, we would say that a couple of these factors are turning, or confirming the turn. And that kind of sets the scene for something more positive, something more constructive on the horizon, at least for 2023.

How will China's reopening benefit global markets?

Normally when China sneezes, Europe catches a cold to start with. So China reopening is going to be positive for Europe. That's a given. The reopening of China, the part we really like, is that consumer side of it. You are unleashing travelling, consumption etc. We're finding stocks that are really tapped into that reopening of the Chinese society again. And that that's a theme that we're quite excited about for 2023.

What's your outlook for company earnings through the remainder of 2023?

We still think analysts are a bit too optimistic. We see a downside we've spent over a year now with earnings expectations coming down. If you look at all the analysts globally, they still expect 1% earnings growth for 2023. We think that's a bit too optimistic. 

But keep in mind that six months ago, they expected 9%. So this is coming down very quickly and I think the part we still miss a bit of downgrades on is that operating margin. So a lot of analysts still have recovery and operating margins for 2023 versus 2022. That looks a bit too optimistic.

But if we take two steps back, we've been in this downgrade cycle for quite some time. It's well known, it's appreciated, it's understood by a lot of market participants. And another way of measuring the earning cycle, which we find is an interesting signal, it's just looking at not how much they're cutting numbers, just how many analysts are cutting numbers. And if you look at that, it's pretty clear that right now a majority of all the analysts globally are busy cutting numbers. And that historically has been a very important first step for a future bottoming and improvement on the earning cycle. So this is something to really keep an eye on in 2023, especially in the second half.

Learn more

As a specialist, active, core equities investment manager, Alphinity's aim is simple and effective: to identify opportunities across market cycles and invest in quality, undervalued companies with underestimated forward earnings expectations. Visit their fund profile or website to find out more. 

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David Thornton
Content Editor
Livewire Markets

David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.

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