EARNINGS seasons in the US and Europe have been strong, and there are signs inflation is peaking, which would allow the US Fed to slow its interest rate cycle, says Pendal’s head of global equities Ashley Pittard.
“The Fed was behind the curve in March and there was earnings risk because of high valuations.
“Fast-forward to today, the market is down 20 per cent and the price-to-earnings multiple has come back from 22 times to about 15 times earnings.”
The June quarter earnings season on Wall Street and in Europe has been solid.
On a sales basis, about half the companies beat consensus forecasts. On an earnings basis that rises to nearly two-thirds.
Not surprisingly, the response from investors has been positive.
There have been exceptions to the good news story. Consumer discretionary stocks in the US, such as Walmart and Target, disappointed.
“But when you look at this market, it’s one that you want to be fully invested in,” Pittard says.
“The US Federal Reserve has lifted interest rates sharply and is now ahead of the curve. In March this year they were behind the curve.”
Pittard doesn’t expect the Fed to continue doing 75 basis point hikes, though rates will still rise.
“We are at the point where the Fed might pause for a bit, or only has a couple of rate rises to go and earnings are growing around 5 per cent.
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“That’s a good position for equities. That’s because the price-to-earnings multiple on Wall Street has come back to more normal levels on a historical basis.”
Pittard doesn’t expect Wall Street to fall much further.
“What you’ve seen in this quarterly earnings season is lower margins. Earnings expectations have also come down and forward guidance from companies have come down.
“You only get massive cuts in earnings growth if you go into a sharp recession.
“That might have happened if the Fed was behind the curve. But the Fed is now ahead of the curve,” he says.
Pittard isn’t definitively calling peak inflation, but he believes it’s close, highlighting a recent drop in oil prices as evidence.
“It doesn’t mean interest rates are going back to zero again, but it does mean rates won’t keep rising,” he says.
In the Fed’s favour is time, Pittard says. The Open Market Committee isn’t meeting again until mid- September — plenty of time for new economic data.
“The Fed has six weeks leeway. It will be data-dependent going forward, and that’s important,” Pittard says.
“Something else could happen such as the war in Ukraine pushes prices back up.
“But right now inflation is peaking, there’s negative real interest rates so policy is still accommodative, there’s wages growth of 3-to-4 per cent, there’s capital spending, there’s savings built up, and there’s a bunch of initiatives from the US government which mandate spending for renewables.
“You could argue very strongly that you just want to be invested and cash levels are close to their lows.”
Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.
Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.
Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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