May Insight: In a holding pattern

We open with a strategy piece by Alastair George, who believes that global markets appear to be in a holding pattern. Following the banking mini-crisis, investors are still appraising the ultimate impact of the long period of rising global interest rates and declining credit availability. Inflationary pressure, even if on a declining trend, has proved stubbornly persistent. The tightening of credit conditions in the US – and rapidly declining credit growth in Europe – portends a slowdown in economic activity. For now, the services sector of the economy appears to be in robust health, but surveys and commodity prices suggest fading demand in the manufacturing sector. A 12-month period of declining earnings forecasts has proved a challenging headwind for equity markets, but global earnings forecasts for 2023 now show some tentative signs of stabilisation. If sustained, this improvement in the fundamentals will be a welcome development, finally aligning consensus profits forecasts with relatively muted GDP growth. Nevertheless, mid-single digit consensus earnings growth for global equities seems an insufficiently attractive foundation for a major rally, at least until 2024 is within sight. Equity valuations continue to trade at above-average levels in the US and at close to long-term averages in other regions. There is no discount on offer for the risks of an economic slowdown or geopolitical volatility. The next six months are likely to be difficult for central banks as stubbornly high inflation readings may require them to consistently talk tough to manage inflation expectations. However, as the credit cycle has already turned there is likely to be only limited further tightening. We maintain a neutral outlook on both global equities and global bonds. Global equity valuations slightly above their long-term averages offer little directional guidance at a time of cyclically low earnings growth, leaving investors in an unsatisfying holding pattern.

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