Vienna Stock Exchange News

Market analysis: A hot autumn could follow a hot summer

Thomas Neuhold

The summer has been hot on all fronts: the climate, the geopolitical scene (Taiwan, Ukraine), the European power market, as well as the appetite for risk. Of course, the latter occurred at a point of extreme bearishness with the "R" word all over the front page of the newspapers. Don't count your chickens until they are hatched though, and we certainly see equity markets revisiting their earlier lows in the coming weeks. 

The word "uncertainty" is still the one that best describes the current global macro environment. Making predictions is currently highly challenging: the relationship between China and the US is going from bad to worse, the Ukraine/Russia confrontation shows no relief, gas and power prices make rationing a more credible outcome in Europe. On the other hand inventories of goods are rising fast, China-West trading activity has improved decisively and freight prices are cooling down. 

While we are rather aligned with the cautious stance of the consensus on risk assets, we find ourselves at odds with the thinking of many markets’ participants about how to read potential positive signals about inflation (e.g. some confirmation it would be receding). Indeed, many in the street seem to think that lower inflation means lower rates, and that this is good news for equities, in particular growth stocks. We assume US bond yields would be unlikely to break 2.5% over the next few months even in the case of positive developments on inflation. Breaking 2.5% would be possible if recession turns out to be much more severe, which wouldn’t be positive for equities. Hence the logic of some investors calling any downward move of US bond yields a reason to add back more growth stocks highlights that the bear market in Growth has more downside, in our opinion.

A scenario of synchronised global slowdown – even mild – with falling inflation cannot be good for corporates’ profits, all the more so given little valuation multiples tailwinds. The US won’t escape those trends and the dollar strength will further weaken their international profits. The over-exposure to US stocks – which is inevitable today for global investors – will become even more problematic when global inflation pressures ease and monetary tightening outside the US (typically in Europe) abates.

Thomas Neuhold, CFA
Head of Austrian Equity Research, Head of Real Estate Research
Kepler Cheuvreux
31 August 2022

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