A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Goldman Sachs U.S. equity strategist David Kostin is not optimistic about the forward path for equities,
“While the Fed remains focused on battling inflation, much higher equity prices would ease financial conditions and therefore be antithetical to the Fed’s goal. As a result, the best case scenario for the economy – and, eventually, for equity prices – probably involves a continued period of constrained equity market returns. If the economy avoids recession but real interest rates move substantially higher, equity multiples will likely be vulnerable despite a narrowing yield gap [the difference between the inflation-adjusted earnings yield on the S&P 500 versus bond yields] . For example, a real yield of +1% and yield gap that tightens to 480 bp would reduce the P/E multiple to 17x (-3% from current), but it would be closer to 15x (-15%) if the yield gap remains unchanged from today’s level. Accordingly, risks around equity valuations are skewed to the downside even in our base-case, non-recessionary scenario … Tightening financial conditions and poor market liquidity make it difficult to argue for a short-term rally similar in size to the one in late March.”
“GS’s Kostin: “risks around equity valuations are skewed to the downside even in our base-case, non-recessionary scenario”” – (research excerpt) Twitter
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BofA Securities global head of research Candace Browning publishes a Must-Read Research This Week. The latest edition highlighted the work of economist Ethan Harris on food price inflation,
“Agricultural food prices jumped 37% in March after a 28% rise in 2021 and our commodities team suggests there’s room for further upside given supply issues related to the Russia-Ukraine war. The pass through from ag price changes is relatively slow, leading Ethan Harris and the economics team to believe food inflation will remain elevated for the rest of the year. Higher prices are more of an issue for emerging markets than developed ones—food accounts for about 50% of CPI in Zambia and India, but less than 15% in many developed markets. Higher food prices could lead to political instability and we believe Africa is most vulnerable as the continent has the biggest dependency on food imports. China, however, should see limited CPI impact from higher ag prices according to our China economist”
“BofA: “Higher [food] prices are more of an issue for emerging markets than developed ones”” – (research excerpt) Twitter
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Morgan Stanley chief economist Seth Carpenter wrote that “the ingredients for a global recession are on the table,”
“Fears of a global recession abound, and in the past three months we have revised our global growth forecast down 170bp while inflationary pressures have risen. We live in the most chaotic, hard-to-predict macroeconomic times in decades. The ingredients for a global recession are on the table. My colleague Mike Wilson is calling for a substantial further selloff in US equities, even in the base case of no recession. Consider that the recovery from Covid means companies that have over-earned – especially those producing consumer goods whose demand has soared – will face a reversal of fortune. What’s more, higher rates and falling growth are never good for valuations. Avoiding a recession is our base case, but markets will have to confront the rising probability of one regardless. China’s sharp slowdown is clear. Last year, the Chinese government embarked on a regulatory reset that caused a marked downshift in the economy. Then successive waves of Covid buffeted the country "
“MS: “The ingredients for a global recession are on the table”” – (research excerpt) Twitter
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Diversion: “World’s Largest Plane Pulls Off Its Latest Flight Test” - Gizmodo
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