Markets continue to be prone to earnings downgrade

Oksana Patron

22 November 2022

Investors should account for the possibility that given the continued uncertainties in the external environment, the broader market will remain susceptible to material earnings downgrades over the next few quarters, according to Bell Asset Management.

The fund manager said that despite the rally of global equities in October, during which the US and European markets showed broad based strength while Hong Kong/China remained the ‘notable underperformer’ due to the persisting COVID zero policy in China, the market sentiment went from hope to fear and back again.

“It has been the type of market where even if you were privy to some of the key economic data ahead of time, it may not have helped you with predicting the subsequent equity market moves, such is the tug of war between the impact of perceived ‘good’ news or ‘bad’ news,” Bell AM said in a note.

Further to that, the market appeared to expect a recovery on the US Federal Reserve and other central banks pivoting to an easier monetary policy, in conjunction with an easing in inflation and overall soft landing of the economy.

However, the manager stressed, the persistent levels of inflation and strong employment conditions were keeping the odds of any major pivot in check for now and arguably ramping up the chances of a hard landing as interest rates may get pushed too far.

Also, the accelerating signs of layoffs and hiring freezes accelerate, the potential positive takeaway from a macro standpoint was that a gradually rising unemployment rate could go some way to easing wage inflation pressures and thus better enable a softening in the hawkish stance of many central banks.

“We still believe that the broader market is susceptible to material earnings downgrades over the next couple of quarters and while our portfolio companies won’t be immune if this happens, we are confident that we are well placed to outperform in an environment where earnings certainty and other quality factors such as balance sheet strength, come to the forefront of investors’ minds,” Bell AM said.

“As always, we aim to construct a portfolio which has exposure to a diverse set of quality companies trading at a reasonable price, as we strongly believe this is the optimal approach to manage downside risk and capture upside potential over the long term.”