While there is much to be concerned about in terms of the global economic outlook, it may be a case of “things can only get better” for equities, according to Andrew Millington, head of research at Abrdn.
He said: “Equity investors will be glad to put 2022 behind them and they could be forgiven for thinking that things can only get better as we head into 2023. From an equity-market perspective, they may well be right.”
Millington added: “But let’s not get too carried away. A lot of the market pressures in 2022 – sky-high energy prices, the broader cost-of-living crisis, tax rises and rising-interest rates – have yet to exert their full impact.
"Sadly, the full pain will only be felt next year. We expect significantly slower GDP growth in 2023 and, even now, the conversation with companies has shifted from supply-chain concerns to the impact of lower demand. While inflation expectations may have peaked, the full impact of inflation on corporate margins will only be seen next year. Wage inflation is the most significant cost uncertainty for many companies.
What’s more, aggregate market-level earnings forecasts for 2023 have yet to adequately reflect the likely slowdown in GDP growth.
This is particularly the case in the UK and Europe where, Millington said, earnings expectations may have more than 10 per cent to fall next year.
But he noted that much of this bad news was already reflected in equity valuations.
In terms of which parts of equity markets may be attractively valued right now, he said: “While stock valuations have come down sharply for cyclical sectors and are largely pricing in recession, more defensive sectors, such as consumer staples and insurance, are trading broadly in line with their long-term average.
"Regional valuation discrepancies have continued to widen, with the US market not looking particularly cheap relative to even its own history. Commodity stocks have performed well, but the market isn’t viewing current energy and resources pricing as sustainable. In most regions, we still see reasonable value in those sectors.”
david.thorpe@ft.com
