The Wrap: Global Recession; Equity Valuations; Food Inflation; Rain

Weekly Reports | Sep 23 2022

Chance of a global recession, Australian equity valuations, winners from food & beverage inflation, and more rain expected.

-Oxford Economics does not see a global recession
-Australian equity valuations fair, says Wilsons
-Jarden pricks its winners from ongoing increases in food & beverage inflation
-BOM warns of a wet spring and summer, impacting general insurers

By Greg Peel

Global Recession?

Oxford Economics continues to believe the global economy will narrowly avoid a recession, despite expecting the US, Canada, and most of Europe to fall into recession at some point over the next year or so.

Avoidance of a global contraction while several large economies fall into recession wouldn't necessarily be an unusual outcome, Oxford notes. Since the 1980s, there have been nine advanced economy recession clusters, but only five of these have coincided with two or more consecutive quarterly falls in global per capita GDP - the benchmark for a global recession.

Oxford points out that all five US technical recessions since 1980 have coincided with a global recession. But the economists expect the upcoming peak to trough GDP fall in the US to be far smaller than in any of the previous five slumps. Therefore, it is reasonable to believe a global contraction could be avoided.

However, it wouldn't take much additional advanced economy weakness to mechanically push the world into recession, Oxford warns. But risks aren’t solely tilted to the downside. In particular, a sharp drop in European energy prices and/or decisive action by governments to protect the economy from the energy shock could lead to milder recessions in Europe.

The only region Oxford sees as escaping two quarters or more of falling activity is Asia-Pacific. For most economies that do fall into recession, the duration is expected to be only two or three quarters, and all the quarterly contractions in activity within the advanced economies take place between now and the June quarter next year.

Australian Equity Valuations

Australian equity valuations have experienced one of the largest reversals of any major market, Wilsons notes, down -30% from the peak in December 2020 on a forecast price/earnings basis (and down -15% this year).

The market currently looks undervalued, Wilsons suggests, relative to its own long-term average, and appears attractive compared to global peers. Buoyant earnings in the resource sector likely overstate Australia’s valuation appeal to a degree, but Wilsons thinks domestic valuations are at least fair.

Although valuations are a key signal over the long-term, they are just one piece of the puzzle, along with factors like monetary and fiscal policy, the near-term economic outlook, sentiment and positioning.

Understanding how these factors evolve through the cycle and what investment horizon they provide signals for is helpful in determining the weight to give them, the analysts note. Lower valuations partially reflect the rising interest rate environment and concerns that earnings will be subject to significant downward revisions reflecting slowing growth.

Wilsons remains Neutral on equities, waiting for a confirmation of a sustained cooling in inflation and policy hawkishness before considering an upgrade.

Inflation Rising

On the subject of inflation, Jarden surveyed 56 Fast Moving Consumer Goods retailers earlier this month and to Jarden, the results were clear.

Inflation will accelerate. Prices increases of 8.6% have been put through with 72% planning further increases in 2022.


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