5 min read 18 Oct 22
Summary: September proved another gloomy month for markets as hawkish central banks, fiscal policy shocks, escalating geopolitical tensions and unwelcome growth and inflation data created market volatility and weighed on investor sentiment. As the dismal outlook for global growth takes hold, are company earnings expectations still too optimistic? Investment Specialist, Kirsty Clark reviews recent market performance and earnings expectations amid a deteriorating global outlook.
There was little to celebrate in September with equity, commodity and bond markets all falling amid concerns of rising interest rates and the prospect of recession.
The MSCI AC World Index finished the month down 9.5% in US dollar terms as investor sentiment deteriorated, and is down around 25% in US dollar terms year to date. Value outperformed growth, and defensives outperformed cyclicals. In Developed Markets, large caps pulled ahead of their small cap counterparts while small caps proved more resilient in Asia Pacific and Emerging Markets.
Source: Refinitiv DataStream, 30 September 2022. Total Returns in USD.
The FTSE 250 Index of UK mid cap stocks remained one of the weakest performers in September, with the turmoil in gilt markets, a plummeting pound and ongoing political uncertainty adding to the downward pressure on share prices. Asia ex Japan and Emerging market equities were also among the laggards in September, weighed down by weaker performers including South Korea, Taiwan and China on the back of slowing growth. Indonesia, Mexico and Brazil outperformed in the month. European equities were also among the strongest performers.
All global sectors finished the month down, with traditionally-defensive areas including healthcare and consumer staples proving the most resilient in September. Technology stocks were the hardest hit, particularly semiconductor and tech hardware names. Energy performed broadly in line with the market in the month, and is the only global sector to have delivered a positive return year to date.
Hawkish central banks and successive rate rises continued to put pressure on developed market sovereign bonds. UK gilts saw the greatest volatility after the (then) Chancellor’s fiscally-expansive mini budget and announced tax cuts were poorly received by markets, forcing the Bank of England to intervene to prop up gilts. Global high yield and investment grade corporates also fell in September, along with emerging market bonds.
Concerns of weakening demand and slowing global growth continued to cool the commodity markets. Brent crude, gold and copper all finished the month down. European gas prices also came off on the back of broader growth and demand concerns, despite escalating Russia/Ukraine tensions and continued concerns around European energy security.
In currency markets, the US dollar strengthened against a basket of currencies. Meanwhile, sterling took another leg down, nearing parity with the US dollar and almost reaching its 1985 lows, following the announced tax cuts (before a subsequent U-turn by the UK government).
With global inflation forecast to rise from 4.7% in 2021 to 8.8% in 2022, central banks globally remain firmly focused in taming inflation, but the collective hawkishness of central banks surprised markets in September and fuelled growing expectations of recession in developed markets.
The IMF forecasts a slowdown in global growth from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. With the prospect of a more pronounced slowdown, the forecast probability of recession in developed markets has risen both in the US and Europe, with median estimates now sitting at 60% for the US and 90% for Germany.
Source: Bloomberg, LHS Chart: 14 October 2022. RHS Chart: 17 October 2022. Bloomberg Median Forecast Probability of Recession in Next 12 Months.
Purchasing Manager Indices (PMIs) have been weakening across the board. In the US, UK and Euro Area, these were in contraction territory in the third quarter. Yet, corporate earnings have remained extremely resilient – notably, UK and Eurozone 2022 consensus earnings forecasts have been revised up 33% and 12% respectively year-to-date.
As my colleagues noted in our latest Quarterly Equity & Multi Asset Outlook, corporate earnings expectations feeding into valuations are at odds with increasing expectations for a growth slowdown ahead. Consensus earnings forecasts have come down recently, but likely not enough.
Source: Thomson Reuters DataStream, 14 October 2022.
We have started to see the tide turning as a number of companies, including retailers and semiconductor companies exposed to end consumers, have been guiding earnings lower in recent weeks, while others have started to tightening their belts. As we head into the third-quarter earnings season, softer activity data and weakening consumer sentiment could see earnings revisions for developed markets begin to fall into negative territory.
However, the corporate sector remains in decent shape and many companies continue to report strong pricing power. In general, company balance sheets are a lot stronger now than they were prior to the Global Financial Crisis (GFC), and the capital adequacy of the banking sector is in much better shape.
Despite fiscal policy uncertainty and recent market volatility in the UK, large cap equities continue to benefit from sterling weakness, elevated commodity prices and rising interest rates, and are offering attractive dividend yields. A weaker sterling is also likely to support ongoing M&A activity.
In Asia, the poor outlook for global economic activity is being increasingly discounted by many regional markets. Our Asia equities team believe companies with strong fundamentals are now trading at particularly attractive valuation levels, providing interesting pockets of opportunity for long-term investors, while corporate reform in Japan continues to provide micro‐driven, bottom up opportunities.
Markets are being influenced by a multitude of factors and companies remain affected in very disparate ways. Even within the same sector, companies are faring very differently based on tilts in exposure, balance sheet solidity and pricing power. The market volatility is creating some interesting return opportunities for long-term investors, but selectivity and diversification remain key.
 Source: Bloomberg, October 2022
 Source: International Monetary Fund, October 2022 https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022
 Refinitiv Eikon DataStream, October 2022
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.