Note Precis Aug. 18,2023: Not Lazy, Hazy Summer for 2023. It is not a lazy, hazy summer for 2023, neither climatologically from droughts to floods to wild fires and nor for risk premiums versus momentum in capital markets. The war in Ukraine has revived talk about a new cold war but the Soviet system was not an equal. It is currently more apt to recall the long turn of the 19th century rivalries amid the emergence of then new technologies of steam/steel/textile. From military to economic footprints, the existent competition between the United States and China is of quantum difference from the cold war. Then as now with 5G and cloud computing in emergence, new technologies then did not salvage momentum investing amid a lack of risk control. As valuation imbalances are addressed via volatile capital markets, we expect FICCs and equities linkages to rise.
Into their August 25, 2023 Jackson Hole gathering, major central banks face differential challenges. Many governments also did not use the quantitative ease period to strengthen fiscal balance. Unlike its earlier stable locomotive role, deflation and excess credit press in China. Despite recovery, Japan seems espousing minuscule rates. For many OECD countries, inflation seems stubborn at well above 2%. Further Fed Funds rate increases to 6% seem likely as are other major central bank rate increases from differentially lower levels. With more stable exceptions like India, in emerging countries appear high inflation and currency stress. Unlike 2008 to 2021, currency turmoil is likely, among even major economy countries.
Amid technology driven change, war and natural catastrophe, commodities realities contrast with conventional assumptions of being late cycle investments. Scandal in cryptocurrency underscores precious metals as diversifiers. Commodity related events compounded with fiscal deficit pressures appear likely to further sensitize credit quality criteria. Emergent already are signals of “sell what you can” in Fixed Income liquidity.
As 10 year U.S. Treasury note yields approach 5%, the pressures are likely to rise on rationalizing yield tranches, including between the currencies of fixed income denomination.
Exogenous and internal aspects favor quality as capital market criterion, including rebalance in equities between momentum and valuation. About momentum, an alternate reality appears in the S&P 500 actually peaked in late 2021. In 2023 to August in weaker global growth and extended inflation, geographical rotation has been conventional with the U.S. among the lead, a twist of hope of Japan restructuring, lag from Europe and emerging areas tentative pending tangibly stronger global growth.
In equity markets in a hot and cold tryst with momentum, valuation globally is not low. The S&P 500 as benchmark is some 16x a fulsome consensus estimate for 2024 operating earnings. Consensus appears tardy in readjustment to a more challenged period. In the first two quarters of 2023 corporate results, margins appear declined to more sedate levels, companies more circumspect and cutting costs. Financing costs appear rising. For the globally crucial financial services sector, capital strengthening controls appear likely to expand due to inadequate risk control exposed in segments of U.S regional banks and European SIFIs.
In asset mix, we favor for shorter duration in fixed income and for precious metals as diversifier. In equities, facing readjustment expected to encompass markets globally, geographical rotation seems secondary. As primacy, we expect bifurcation of delivery within sectors and favor quality, with balance a priority overall, for instance about Information Technology weightings. eoe