Q4 2023 equity market outlook

Five charts on the key equity market drivers (Q4 2023)

Global Concentrated Alpha outlook summary:

In our Q3 equity market update, we stated that the market was ignoring risks in the first half of the year, but - despite a positive July - there is more appreciation for interest rates remaining higher for longer amongst investors
The question is how much longer the US economy could remain supportive and the US consumer spending
As a result, we see more attractive opportunities in defensive sectors
Equity valuations in the US seem extended despite no earnings growth, while rest of world looks more supportive

Figure 1: The pandemic has significant impacts on personal income and consumption

Source: Gavekal Research/Macrobond as at June 2023.

A graph showing steadily increasing disposable income and consumption from 2016 to 2023 with a large deviation from the trend in 2020 where there was excess saving; disposable income increased, and consumption dropped. The original trend stabilized from September 2021 onwards.

Figure 2: The savings rate is abnormal low after pandemic-related volatility

The US consumer savings rate is below its 2019 average

Source: Bureau of Economic Analysis (BEA), Haver Analytics, BofA Global Research as at 31 August 2023.

The chart shows the saving rate from 2017 to 2023 in relation to the horizontal 2019 average saving rate. Up to 2020 the saving rate hovers around the 2019 average with a huge spike in saving from 2020 to 2021. From 2022 onwards the saving rate was lower than the 2019 average rate.

Figure 3: European cyclicals vs Defensives relative and PMI

European cyclical companies have outperformed defensives, despite falling PMI data

Source: IBES, S&P Global as at 10 July 2023.

This chart shows that from 2001 onwards the MSCI Europe Cyclicals vs Defensives and the Euro Area manufacturing PMI had followed a similar pattern however in 2022 to 2023 there has been a huge deviation between the two with the MSCI Europe Cyclicals vs Defensives being significantly higher than the Euro Area manufacturing PMI.

Figure 4: S&P 500 12m Fwd. P/E

Equity valuations in the US seem extended despite no earnings growth

Source: Datastream as at 10 July 2023.

This chart shows the S&P 500 12m Fwd. P/E in relation to the median and also plus and minus 1 standard deviation. The chart shows the S&P 500 12m Fwd. P/E was much lower than minus 1 standard deviation in 2009 and much higher than plus 1 standard deviation in 2020.

Figure 5: MSCI US 12m Fwd. EPS

Source: IBES as at 10 July 2023.

The chart shows the MSCI US 12m Fwd. EPS from 2019 to 2023. The chart is stable around 160 until 2020 where it drops to below 140. Since mid-2020 it has steadily been rising to now being relatively stable between 200 and 220.