Rudi’s View: Quo Vadis, Corporate Profits?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jun 02 2022

In this week's Weekly Insights:

-Quo Vadis, Corporate Profits?
-Conviction Calls
-FNArena Talks

By Rudi Filapek-Vandyck, Editor FNArena

Quo Vadis, Corporate Profits?

Bad things tend to happen when global economic growth dips below 3%. In recent days I have been alerted to this historical observation by multiple economists and market analysts, so I thought it is worthwhile highlighting this point.

GDP forecasts around the globe are in decline, with many a forecast now sitting marginally above 3% for the global economy this year and next. This makes that historical observation potentially even more important.

One key ingredient to those forecasts is, of course, how much central bank tightening needs to occur to bring consumer price inflation back under control.

Truth is, we don't know. Which is why traders, investors and central bankers are all watching the data very closely.

Markets Oversold In May

Global equities had looked technically oversold for a number of weeks, but that interview by Fed Chair Jerome Powell to the Wall Street Journal mid-month had kept a firm lid on overall enthusiasm to start piling back in.

'Don't fight the Fed' has a different meaning this time around.

Investors needed a bit of extra time to fully digest the new Fed narrative. Controlling inflation is now of the uppermost importance (see also further below).

When markets are oversold, the smallest hint of optimism can trigger the next rally. Last week US indices rallied more than 6% to post their best week for the calendar year to date. According to the latest economic data, the all-important US consumer remains eager to spend, even if this means he/she has to dip into savings.

And there are quite a few suggestions that inflation is no longer poised to keep surprising to the upside, despite expectations for higher energy and materials prices in the quarter(s) ahead.

Peak Inflation Anxiety?

Reduced anxiety about inflation in particular might be the most important development in May, if it proves to be accurate. It implies that bond yields might have peaked already, as also shown by the US ten-year yield declining towards 2.75% from 3.10% earlier.

A more relaxed US bond market might allow equity markets to become less volatile, in a general sense, but it will also allow those market segments that had previously de-rated to shift back onto investor radars.

Think bond proxies such as REITs, property developers and infrastructure owners, but also Quality and Defensive Growth stocks that traditionally trade on higher valuation multiples.

In Australia, I note both Carsales ((CAR)) and Goodman Group ((GMG)) shares are back above $20, while the likes of Cochlear ((COH)), NextDC ((NXT)) and IDP Education ((IEL)) are well off their lows.

One cannot argue with 'hope' and it is very likely equity markets will adopt the view that if central bankers can relax more about further momentum for inflation, they don't have to stick with their intentions for aggressive tightening. This reduces the risk for over-tightening, and thus for an economic recession.

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