The data dependent actions for the next few months will be centered around whether the hikes are gradual or aggressive. While the US seems to have more wiggle room to extricate itself from a disastrous scenario of a depression, Europe looks particularly cornered with an ever-worsening energy crisis, strong inflationary impetus from wage increases to come and growing stresses at the periphery. For Switzerland, as an export country, the ever-lower euro will add to the challenge of cost inflation and supply chain disruptions. While companies are foreseeing, or rather hoping for, an easing of the supply chain issues, inflationary pressure could continue into 2023. Continued price increases will remain key to defend its profitability, even at the cost of a time lag. However, we fear that at some point, the consumer will have to give in to the cost-of-living crises and cut back on discretionary purchases, as well as trade down on everyday goods and services. So far, elasticity of demand has been minimal, but in times of unprecedented pressure to consumers, reaction could be violent and erratic.
Earnings estimates have come down for the current year, settling for a 5% growth in profits for 2022[1], which is half of what was expected a few weeks ago. We believe that the prospect of an acceleration in 2023 to around 13% is strongly dependant on the resilience of the consumer and stabilisation of companies’ cost base. We remain rather cautious on both aspects. As for market action, the accelerated withdrawal of liquidity in September by central banks risks drying up market flows in general and may cause air pockets to appear in various asset classes, testing the nerves of market participants. In summary, September and October could be very challenging months for financial assets.
We focus on high quality portfolio holdings, and constantly review our positions, looking out for opportunities to add new positions of long-term value creators that haven’t been included yet.
[1] Source: Morgan Stanley, Data Gallery
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