Global EPS

So far, the global EPS story remains intact. As Tim Duy (Oregon economist) put it, when you “hard stop” the housing market, through a doubling in mortgage rates, it seems correspondingly difficult to see how such estimates might hold.

But, as others note, management commentary & outlook is still robust. We just had FedEx upgrade guidance, and before that the US homebuilders pointed to still strong conditions.

In my view, management commentary is a lagging indicator. But mostly I get Aussie stock specific takes, which have a 6-month reporting window, so it is plausible that more timely quarterlies (on offer in the US) provide a better/coincident-rather-than-outright-lagging indicator of conditions, something I’ve not seen empirically studied.

The only sector with firm EPS downgrades (looking at the ASX 200) has been the IT names, most of which weren’t profitable to begin with. Consumer discretionary is seen to be over-earning, a view we agree with, and, in our view, actual downgrades to come as a lower-share-of-wallet bites.

Overall, however, global PE’s are pretty compelling. Earnings might well fall (tightening, energy prices) putting the forward PE 2-3 points higher, on average, across the globe, but that would still lead to relatively attractive ex ante returns.

The “everything bubble”, as Cliff Assness termed it, is gone, with just “quite a few things bubble” left (e.g what remains of crypto, NFT’s, SPAC’s, Cathy Wood’s ARKK).

That’s why we are sitting pretty close to our SAA weights in international equities (underweight in Aussie equities).

Some things look good, some things look bad, valuations tie them together with “reasonable” compensation for unknown/uncertain risks, and avoiding a big bet either way seems sensible.

If they fall further, we’ll increase our exposures.

Note, this commentary about buying/selling/risk-management is a function of our earlier allocations, we were quite underweight international equities coming into March, and started adding after war broke out, which impacted everything from European to Emerging to Japanese equities.

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