Australia Strategy: Global leaders update

About the author:

Author name:

By Tom Sartor

Job title:

Senior Analyst

Date posted:

08 December 2022, 7:30 AM

Sectors Covered:

Junior (Emerging) Resources, Bulk Materials

• Our Asset Allocation Update – 2023 Outlook details our recommended 17% exposure to international equities for investors with a Balanced risk profile.
• While the macro-economic backdrop remains challenging, 3Q US earnings again highlighted resilient consumption for now, fueling hopes for a soft landing.
• Several global franchises are trading at 20-40% discounts to consensus estimates of intrinsic value, offering opportunities for long-term portfolio investors.

Mixed views from 3Q US earnings season

US economy: There are certainly signs of cooling in the US economy but for now it’s difficult to say whether this is purely a healthy slowdown or the start of a recession. It does appear that the inflationary period which began in 2021 is now in transition. The ultimate magnitude of the cooling will largely depend on Federal Reserve policy and it’s likely that US rates may need to remain high throughout 2023.

US earnings trends: Aggregate 3Q earnings for the S&P500 weren’t too bad. EPS for the S&P500 were down 9.7% versus 3Q21 but 4.8% higher than in 2Q22 and 31.8% higher than in 3Q19. The general economy seems to reflect this. That is, things may not be quite as strong as they were in 2021 but US earnings are still much better (nominally) than they were in 2019.

Resilient consumption, but some clouds brewing: The solid earnings backdrop may explain why we have continued to see robust US consumer spending despite recession fears. However, the 3Q insights from US corporates on the consumer, while resilient overall, are beginning to show some cracks.

At its 3Q result Mastercard noted: “We continue to see a very strong consumer. Consumer spending is healthy into November and is generally consistent with our previous expectations”. Lowe’s CEO noted: “...when we look across all of our merchandising departments, we don't have any really red blinking lights of concern relative to certain categories, certain items or SKUs".

However, cracks are beginning to show, as noted by the Liberty Media Chair: "So far we haven't seen very much indication of consumers running out of debt capacity or liquidity, but I think it's right around the corner. If you look at credit card outstandings, if you look at delinquencies and mortgages, they're starting to build”.

All eyes on the Fed: Clearly, tighter conditions have hit the US housing market, with a squeeze having potential to affect the consumer. Some CEOs are acknowledging a likely US recession into early 2023. That outcome is likely to be very much correlated with what the Federal Reserve does, and what the US banks do in response.

International shares bearing the brunt of macro uncertainty

Source: Morgans Financial, IRESS

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.