[Editor’s Note: Julian McCormack is presenting at the upcoming ASX Investor Day on this topic. To learn more, register for ASX Investor Day].
In Platinum’s view, global equity markets may prove challenging for the foreseeable future. Ironically, we think China may prove a source of stability for global equity investors.
Platinum is concerned that the United States is headed into a recession, possibly a deep one. We are already witnessing a significant fall in US corporate profits, and we would expect that to continue in the coming months.
This might sound like consensus thinking, but consensus earnings expectations in the US are for basically no fall in S&P 500 earnings-per-share in 2023 - and strong earnings growth in 2024 and 2025.
We are seeing a strange phenomenon: US equity markets are bidding up highly cyclical sectors like trucking operators or steel makers as if a recession has already occurred. It has not.
In Platinum’s view, US earnings expectations have to come down significantly to match reality before there is any sense in buying early-stage cyclicals, or indeed much of the US equity market.
[Editor’s Note: Do not read the following analysis as a recommendation to sell US equities and buy Chinese equities. Talk to your financial adviser or do further research of your own before acting on themes in this article. Global investing involves currency and other risks, and Chinese equities, in particular, can be volatile].
A summary of the indicators that Platinum highlights to support its bearish view for US equities is:
We could go on. But Platinum reiterates the outlook for US equities is poor.
Meanwhile, China is in a different position altogether. After years of disruption from strict COVID-19 policy enforcement and regulatory crackdowns, China is reopening.
Platinum believes this is unlikely to be anything like the roaring reopening of the West, but it is equally unlikely to lead to an inflationary hangover like that which now confronts the West. Consider the following:
Platinum believes China appears to be aiming for a measured, perhaps even boring, reopening.
In a world where many countries are dealing with the highest inflation rates in decades, equity valuations are high and corporate profit margins are near all-time highs, we believe the approach of China may prove a welcome respite for investors.
This article has been prepared by Platinum Investment Management Limited ABN 25 063 565 006 AFSL 221935 trading as Platinum Asset Management (“Platinum”). While the information in this article has been prepared in good faith and with reasonable care, no representation or warranty, express or implied, is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained in the article, and to the extent permitted by law, no liability is accepted by any company of the Platinum Group or their directors, officers or employees for any loss or damage as a result of any reliance on this information. Commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice. Commentary may also contain forward-looking statements. These forward-looking statements have been made based upon Platinum’s expectations and beliefs. No assurance is given that future developments will be in accordance with Platinum’s expectations. Actual outcomes could differ materially from those expected by Platinum. The information presented in this article is general information only and not intended to be financial product advice. It has not been prepared taking into account any particular investor’s or class of investors’ investment objectives, financial situation or needs, and should not be used as the basis for making investment, financial or other decisions. You should obtain professional advice prior to making any investment decision. Historical performance is not a reliable indicator of future performance.