Cyclicals vs Defensives
Bank failures are another ‘canary in the coal mine’ warning that a US recession is imminent, yet stocks, bonds, and the oil price are still a long way from fully pricing it.
We analyzed US bear markets since 1954 to identify reliable indicators for distinguishing new equity bull markets from bear market rallies. Our checklist of indicators does not suggest it is time to overweight equities in a multi-asset portfolio. Remain underweight on equities, overweight on fixed income, and neutral on cash.
The US equity market is in the midst of an earnings contraction driven by slowing sales growth – a manifestation of the weakening economic demand and loss of corporate pricing power that accompany disinflation. The telecommunications industry is a defensive industry that faces many challenges: Low growth, cut-throat competition, and incessant demands for capital investment.
Thai stocks and currency will weaken over the short term. And yet EM equity portfolios should overweight Thailand as tourism revivals will rejuvenate this economy.
Macroeconomic and business conditions are gradually becoming more favorable for Tech as the bottoming of demand is in sight. Yet, we don’t believe that now is an attractive entry point - the good news is fully priced in, and technicals signal a pullback. However, the sector is worth monitoring as we are getting closer to a sustainable rebound. Our positioning remains unchanged.
The most important question investors need to answer is whether this is the right time to shift the portfolio to a more aggressive and cyclical stance now that the end of the hiking cycle is in sight. To answer this question, we review the most recent macroeconomic, geopolitical, and equity market developments, and do our best to separate facts and data from sentiment and conjecture. We conclude that there are many challenges ahead and equities are not in a clear yet. We recommend investors add small positions in areas of the market that benefit from rate stabilization while maintaining an overall defensive stance.
In Section I, we explain why we do not see the deceleration in US inflation, the likely near-term pickup in European growth, and the end of China’s dynamic zero-COVID policy as signs of a sustainable rebound in global economic activity over the coming 6-12 months. The key question is not whether inflation will fall back to central bank targets, but rather how quickly this will occur. For now, our indicators point to slower but still elevated inflation this year. In Section II, we explore what it will take for the Fed to cut interest rates, and note that nonrecessionary rate cuts are possible but not especially likely.
Heading into a black hole, you pass a point of no return known as the ‘event horizon’ after which your impending oblivion is sealed. US recessions also have an event horizon, which we are fast approaching. We reveal a leading indicator of this event horizon, and what it means for investment strategy.
In Section I, we note that the global growth outlook has modestly deteriorated over the past month, despite an improving 12-month outlook for Chinese domestic demand in response to the imminent end of the nation’s “dynamic zero-COVID” policy. Investors should remain conservatively positioned over the coming year, as we recommended in our Annual Outlook report. In Section II, we examine whether the structural risks facing global stocks are higher or lower today than they were prior to the global financial crisis, and what that implies for stock and bond risk premia.
We explore the eight major themes that will define economic and market trends for Europe next year.