May 29, 2024

Soft Landing on Shaky Ground?


I’ll start off by saying that investors should start considering high-quality bonds, and equities in Japan and emerging markets this year. The global economy will slow down and become more divergent in the remaining half of 2023, with kudos to persisting inflation and the tight monetary policy by central banks globally. In this scenario, investors will find it challenging, to say the least in finding opportunities that earn more than the risk-free return which is the Fed’s current policy rate of 5.2%. Investing in this climate will require a varying strategy by region of playing aggressively in Asia and defensively in the US and Europe. This is a hard choice for investors. Equities and high-yield bonds in developing markets are undoubtedly risky but investors can find underappreciated opportunities if looked at correctly.

Although global economic recovery will be slow, there are significant regional differences that will be reflected in regional investment opportunities proportionately. Asia will see much stronger growth, lower inflation, and relaxed policy in 2023 than US and Europe comparatively.

  • European & US equities fatigue – Company earnings are more than likely to fall short of expectations in the second half of 2023. SPX earnings forecast to drop 16% but I’m expecting earnings to rebound significantly in 2024.
  • Emerging Markets & Japan equities appear attractive – Stellar growth, low inflation and easy policy in these markets with reasonable valuations could deliver double digit returns over the next 2 years.
  • Sector Based Opportunities – In the US, investment managers favor defensive stocks such as consumer staples over cyclicals such as consumer discretionary and technology stocks. There is an upside for technology stocks in EM, Japan and Europe. On the flow, investors can’t ignore healthcare in most regions.
  • Bond Selection – Long duration government bonds in the UK, Germany and US could perform well with attractive real yields despite high inflation and poor carry (ie difference between a bond’s yield and the cost of borrowing to invest in). Soft economic growth without a recession in developed markets suggests that investment grade bonds could be defensive and provide positive returns. 
  • USD Dominance – The USD in FX markets appears attractive as investors are attracted to its defensive qualities. It’s had a negative correlation to equities and positive carry, meaning investors can earn above average returns by owning the currency or dollar denominated assets through currency appreciation. 
  • Normalisation of Commodites – Following the 2022 breakout, commodity markets are reverting to normal conditions. Asset managers think prices for most commodities will be flat this year, given the slower economic growth, meaning less demand for energy and base materials. 

Overall investors are feeling optimistic about corporate earnings growth for 2023. They are of the opinion that the impact of rising interest rates is well behind them and are taking consumer cyclicals, tech and communications services for granted that are due for a comeback after experiencing an earnings recessions last year.  

Halfway into 2023, earnings forecasted, was lower than general consensus. Today that spread is even greater as the 2023 forecast was cut even further while the rest of the Street and buy side managers have raised their estimates.  

I’m now expecting a more meaningful earnings recession, with the SPX EPS falling 16% for the year, that has yet to be priced into the market. There are some who believe in a forecast of a sharp rebound in EPS growth in 2024 and 2025, although it’s hard for me to put a number on it. There is some consensus stemming mostly from some large companies sounding more optimistic about the second half of this year combined with the newfound excitement around AI and what it means for both growth and productivity.  

SIngle stocks will undoubtedly deliver accelerating growth from spending on AI this year, although I don’t think it will be enough to impact the overall cyclical earnings trend in a meaningful way. Conversely it may pressure margins further for companies that decide to invest in AI despite flat or slowing top line growth in the near term. Earnings recessions have often reached bottom in the past seven decades after average annual declines of 16%, which may very well be a similar decline seen in 2023.

Earnings quality, as measured by net income to cash flow, recently reached its weakest level in the past quarter century. This is another warning sign that earnings growth could further deteriorate as the cycle turns and accounting policies reverse or are reset to more conservative assumptions. Moreover the above average earnings during the pandemic and low quality of those earnings are broad based because of expected weakness in cash flow. 

Given all the above when can we expect an earnings rebound next year?  As we head into 2024, the market is processing a much healthier earnings backdrop. Investors who agree with forecasted earnings may decide to simply miss the downside this year. However, given that stocks are trading at 19 times 12 month consensus earnings versus 16 to 17 times historically, this may be a very risky strategy.

Risk warning – As with all investing, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance and the contents of this outlook is not a reliable indicator of future performance. This article/print is protected through international copyright & print laws and may not be reproduced, distributed or copied without exclusive permission from the writer.

Geoffrey Muns is an Independent Financial Advisor and Planner certified from the UK, US and UAE based out of Dubai for the past 20 years. He also works in the PE/VC space and is a seasoned investment banker having worked with international banks and investment firms in the region. You may contact him at

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