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What are the costs of deglobalisation for equity valuations?

Tong Kooi Ong and Asia Analytica
Tong Kooi Ong and Asia Analytica7/21/2022 05:28 PM GMT+08  • 7 min read
What are the costs of deglobalisation for equity valuations?
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Are recent gains a signal that US equities have hit bottom and are poised for a sustainable turnaround or merely a dead cat bounce on the way to more losses? That is the trillion-dollar question on every investor’s mind. We are inclined to believe it is the latter primarily because we think current earnings expectations — estimated to grow 9% to 10% in 2022/23 on the back of near-record-high margins — remain overly optimistic, given the prevailing environment of rising costs of doing business. If so, that means stock valuations are in fact higher than indicated, based on current estimates.

Notably, we are not alone in this thinking. The chorus of similar narratives has been growing louder in recent days. Yet, analysts have, surprisingly, not revised down their forecasts. To be sure, the majority of analysts and asset managers tend to be an optimistic lot and, yes, they do have vested interests in talking up markets. But perhaps they are also hoping that the worse will not come to pass. Indeed, US economic data remains relatively resilient so far, all things considered. The ongoing earnings reporting season for 2Q2022 and, more importantly, management outlook and guidance will provide valuable insights as to whether the sanguine forecasts are justified.

The financial sector has been among the first to report their results (it is still early days into the reporting season). Most have come in below market expectations. Earnings were dragged down by sharply lower revenue from investment banking (corporate exercises, new listings and deal-making) and mortgage origination. Banks were also making larger loan loss provisions, in anticipation of defaults — signalling caution on the outlook. JPMorgan Chase & Co and Citigroup have temporarily suspended share buyback to shore up capital while Goldman Sachs Group said it was “actively reviewing” its programme. That said, one common thread has been that consumer spending and credit growth remain strong, even with the highest inflation rates since the early 1980s.

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