Consumer Discretionary

The expectation that China is best placed to win the global EV race presumes the persistence of the status quo. Reality, however, may differ as the sector looks set to be hit by a range of changes. If nonlinearity were to emerge in the global auto sector, as it often does, then the EV transition could end up spawning a very unexpected list of winners and losers.

We expect the US economy to slow and potentially downshift into a recession sometime in 2024, as tighter monetary policy weighs on consumers and businesses. In addition, (geo)political tensions may increase market volatility. The risk/return for US equities is unfavorable. We recommend that our clients reduce portfolio beta and increase allocations to defensives and quality growth.

Q3-2023 is expected to mark the end of the earnings recession for the past three quarters, opening the door to positive earnings growth. Whether that would be sustainable or will sputter once the recession settles in as expected in 2024 remains to be seen. However, much of earnings growth is already priced in.

European auto stocks are cheap, but even if European carmakers can rise to the challenge created by Chinese EVs, shareholders will suffer.