If consensus expectations come to pass, that’s a good equity risk premia (ERP) to allocate capital against. Note the tech wreck, where the ERP was a terrible-no-good deal, as a bit of baseline.

How plausible those underlying estimates prove to be, is a function of whether monetary policy is still “in train”, to a highly significant degree, as some commentators think (e.g., “we’ve scarcely seen the impact, yet”) which would be bad…

…or, whether it is more or less (these days) instantaneously transmitted (“long and variable” meets “swift and highly predictable”), which would be less bad, as the impacts are already felt, and don’t represent an additional overhang, to the above.

Those earnings are elevated pretty much everywhere, not just a “US exuberant analyst thing”, so the concern of overtightening, and the impact on margin, is relevant wherever you look…

…and margins would seem vulnerable on at least two fronts. One is that the tight labour market means wages eat into margins, and two, that the higher interest rates cause a slowdown that impacts sales and revenue and thus profits.

I suppose you could even have three, which is 1 & 2 essentially combined, where tighter policy causes activity to slow, but firms that are reluctant to let go of employees given how tough/tight/hard it has been over the past 2 years to find workers, choose to hang on to them, thus eating margin all the quicker than in either scenario.

This is the “labour hoarding” hypothesis.

Our view. We don’t know.

Sometimes we know. Sometimes we think we know. This is one of those times where we think we might know. Note the italics, they are doing a lot of the heavy lifting here.

In our view, the soft landing outcome is most likely. China is reopening. Germany is somehow powering along, despite energy. The US labour market outcomes seem to be cooling, without a rise in unemployment. Even some of the housing data looked fractionally better, in terms of mortgage applications.

But the soft landing looks exactly like the hard landing, at the start, so you can’t really analyse the macroeconomic tea leaves, in the way you normally can, and history is not on anyone’s side (soft landings have occurred…virtually never).

So, we are diversified. Some floating rate debt, some duration, some credit. Geographically we are dispersed in our equities, with some value tilts on. Equities in aggregate is close to our SAA. We have a goodly amount of cash, and alternatives. Property is also close to the SAA, having narrowed it post the very large drawdown in REITs.

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