Let me start with you, David. Does the equity market agree with the
bond market about where we're headed? I don't think so.
And then sometimes there are good reasons for the bond market and equity
market looking like they're disagreeing when they're really
agreeing. But this time around, I think the equity
market is ignoring the recession signals that are flashing.
Well, what do you think about that? I mean, are there recession flashing,
signals flashing? And is the equity market disregarding?
The cover for outlook this year was question heavy fog.
And the whole point was that there was a lot of uncertainty.
There's heavy fog. And to have too much conviction on the
probability of a recession is not prudent.
We actually think the probability is 45 to 55 percent.
We've never been this high and we've never had a 10 percentage point range.
So our view is a recession is not obvious and clients shouldn't position
themselves saying there is a recession and let's go underweight equities or
there's no recession. We should go overweight equities.
And we actually don't think the bond market and the equity market are sending
mixed signals. If you look at where the equity market
is and where interest rates are and you compare them to a period like two
thousand and three, four or five, six, that average period, the equity risk
premium, meaning the incremental earnings yield relative to treasuries is
the same today as it was then when interest rates were the same level.
So we don't think it's actually an inconsistent message.
What about the so-called credit crunch love?
It's not a crunch at all, but at least a credit tightening.
He agrees with that. I mean, what is that going to do?
Does that make the likely recession go up?
There's no doubt that we are seeing tightening of lending.
So if you look at the loan officer surveys, more people are pulling back on
lending than not. So quite right.
You see it across the board, all sectors, real estate and otherwise.
But the fact is, is that already priced in the market and is a growth rate of
around one point four or one point six percent, that's the range we have
actually reflecting that. We believe it is growth will probably be
slower by about point 4, 2.5 percent because of tightening of credit, but not
so much to cause a recession. David, where are you on this unlikely to
recession and particularly let me tie in the credit tightening with what the Fed
is likely to do is just let the Fed off the hook a little bit.
Well, it's helping the Fed, but the Fed has more work to do.
We expect another hike in May and there might be more hikes perhaps in the
autumn if inflation doesn't come down faster.
I agree with Sherman that the equity market under the surface there has been
a defensive rotation. So there is some acknowledgment of the
risks ahead. And the equity risk premium is also a
healthy equity risk. Under normal conditions, we're trying to
figure out if her earnings are sustainable and if these interest rates
are sustainable, there's is risk that interest rates go up after this flight
to safety. And I think the bond market is doing
right now and earnings are going downward.
We're in a profit recession. We'll talk more about it later.
But there's more risk to the earnings outlook.
Sure. I mean, let's switch to China just for a
while. We've got China data out this week that
were somewhat encouraging about growth. You have a big report out actually on
China. You're actually even have a chart in
which you compare what happens if you take a hundred dollars at the low point
of the great financial crisis and invest in the different sectors.
Take us through that chart. Yes.
If I had to say over the last 20 years of being in private wealth management,
it's one of my favorite charts because we've had a U.S.
pre-eminence investment view. And this chart bears the fact that this
is actually what is happening. And we think that's going to continue
and that is very important in terms of flow of funds into the U.S..
What the chart actually shows you is if you had put in, let's say, a hundred
dollars in U.S. equities, the S&P 500 versus one hundred
dollars in emerging markets or in developed non U.S.
markets or China, what would the return have been?
You would have earned eight hundred dollars if it was in U.S.
equities and only about 250 in Chinese equities.
So in spite of all this growth and enthusiasm for a China, it has not been
a good place to invest at all. In fact, you'd only earn about a third.
And going forward, we think there's too much euphoria that this recovery from
the lockdown would be that meaningful. We can have a short term recovery, but
generally we think China is going to have a substantially slower
trend growth. And we encapsulated it all in our report
called Middle Kingdom Middle Income. They're not going to escape the middle
income trap. David, too much euphoria over China.
Do you agree? I think there is a bit of too much of
Europe, as you saw here, over the reopening in China.
And it's good for China, it's good for China's service consumption.
But I don't think it's going to stop the profit recession that we expect at the
S&P. And the interesting thing is America is
the greatest. And U.S.
equities over the past 10, 15 years have been the place to be.
Large caps, growth stocks, tech stocks. And suddenly investors have said, why
should I just deviate from what has worked so well over the past 10 years?
The trouble is, things are changing and. Uncertainty on the ability of profits to
keep growing at a strong pace and interest rates stay low is the concern.
So I don't want to be cute about this, but this is sort of like past
performance is not a predictor of future ISE rise.
And your point about Sherman's chart, I mean that this is all fine and good
going back to great financial crisis going forward might be quite different.
We're facing more challenges. Jeremy So the gap between the US and the
rest of the world may not continue to be as big in terms of outperformance, but
the growth in the US is driven by earnings per share growth.
It's not driven just by price action and multiple action.
And if you look at the earnings per share growth in the US, the other
countries don't even come close. If you look at China, it has lagged and
it's not looking at a particular window where earnings per share growth may have
been much higher. It's actually looking at long term
earnings growth in the US and sector by sector.
Most of them have underperformed the US. I love what you're saying.
I'm happy to elaborate on it. There's a difference between growth and
good return on capital and the S&P 500 American companies.
They know how to get strong returns on their incremental investment spending
and a lot of that has come through globalization, digitalization and we
have to see how much more upside there is on those things.
Well, let's just end on that globalization question, because I'm not
saying we're going entirely away from globalization, but it's not going to be
the way it was in the past. It looks like it's going to be more
divisive than it was in the past. Shery Ahn, how does that affect your
analysis? If one has to think of which country in
the world has benefited the most from globalization?
It has been China. China's growth rate is completely
dependent on globalization. They have huge surpluses.
They've used that surplus to build the property sector, build the
infrastructure, infrastructure business that they have and very dependent on
exports. If globalization at the margin decreases
a little bit and globalization peaked in 2000 and eight before just at the peak
of the global financial crisis, then they are going to be hurt the most and
the US hurt the least. So in fact, the slight the globalization
even would be very beneficial for the US and hurt China.