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    Screen Shot 2021-11-21 at 4.40.30 PM

    Uploaded by

    Krishna Mohan

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    of 6
    Global market risks in ’22, Part I Key Takeaways jing earnings relate to forward earnings growth, beat rte m.revisons, and earnings + Also watching spreads between earrings yields and bond vies and correlations between yilds and + Moving to neutral on rising US. dolar but natexpecting a break of 2020, igh As we consider here the markets willbe heed ing n 2022 it can hep to review the progress in 202% in addressing the curent yar, our 2021 Global Outock applied the of used Goldlocks ‘analogy masking whether the macro infuences would be Yoo cold with dfiatonary disappoint ments, "toa hot with faonary pressures or "justright with improving real growth globally. Soaninto the new year itstated to become ear thatthe markt outlook incuded ‘sn- le-digt correction risk’ but not “double-digt bear markt rik wth the indicator improve ‘mont warranting an equity exposure upgrade to the maximum. And by mid-year we coud say thatthe ust ight’ scenario had prevailed But we aso waned that "Yao good" could become the batter description. The risk we ‘exhined is that the deal conditions lead Peak in forward earnings growth SCI AI Country Word ie Leal Currency to dsapporement” Itcannow be said thet “t0@ 900d" lin fact the relevant description for the isk ws 2022 approaches, Wo have con tinued to se similares to 2077 year of ow volatity and person oamings growth that held multiple expansion in check even as equity benchmarks reached record highs. Compacen: .yfolowed a set-up for dsappointment and 3 dourshit in eorings expectations when global ‘ecenomic condtions wersaned in 2018 There ae enough differences fr doubting that 2022 willbe a replay of 2018 among them the magnitude of the moves this yea. As shown above the year-to-year chango of ACM ‘earings has rebounded more dramatically thant id during the earlier year. Butrow as then the earnings growths raising @ potentially ‘markot-treatening question ~ lth as good asit gets? ‘Year to-year comparsons alone make that ley. But the market performance may have ‘lotto dowth the extent ofthe fture growth soudiown, inthe postive scenarig the chart soli ine remains above its dashed ine asthe earings growth remains above the foward growth ofa year earl. nthe nogatve scenario, earings growth crops more sharly than the forward growth, crossing below it ‘As indecated in our Global Earnings Summary report the earnings growth pictures consistent {across the regions in our sever-way framework, with the forward growth pointing to earnings ‘growth downtrends in all ofthe regions. ‘Among the 50 ACW component markets sbout three quarters ofthe markets have positive year-to-year earrings growth (ight third cp) while 92% have postive forward growth (sec- fond clip). That's down from 100% And ifthe forward breacth percentage drops further with the taling earings breadth percentage rong ‘over as wel the chart wil lok ike did entering 2018. ‘Another recent development isthe slawdown ‘and negative momentum ofthe earnings beat rates. After71% of the ACW earings reports beat expectations in the second quarter, Earnings beat rates losing momentum Forward earnings growth exceeds trailing in fewer markets tanta eeuee tt Geen SSS ESESE EES ‘the beat rate stands at 68% with reports from. about haf ofthe companies Goft) At this rate, the year-to-year point change will be negative forthe third quarter. Thats also the case forthe US. Canada, Japan and Emerging Markets as, indicated in our report on Earnings Beat Rates “Tho boat rato pictures thus consiston with anvearings cyt that’ far mare metue thant was in May. We explained then tat eventualy ad inevitably.vestrs would come to expeet the postive best rates in which case postive surprises woud ro lnger be suprising. Whereas the beat rate momentum of May was consistent with a sustanabie global bull market, the chart shows thatthe beat rate momentum has tended to recede as the builshave matured ‘and turn negative with global bear markets underway. While watching to see whether the ‘talings earings come through better or worse ‘than the previous year’s forward earnings in 2022, we will see lf beat rates stabilize or Rate of positive earnings revisions rolling over contunterecede with mgrtve momen | Aco Wai ig ann onwinh ean tum thoy i re dob bx met ai a8 Nectar tang steno omg ‘Alto turning downward are the percent- ages of companies with postive earnings revisions Tho percentages have dopped rom thai highs forthe ACW and for al seven indoes in our regional tamework Demonstrating how the revision trends tend to lead the eamings trends, the chars in our Earn- ings Revisions Summary report move the revi- sion percentage foward by a year. The chat at right shows that the ACW percentage appeared ‘ohit aceling in 207, leaing the earings ‘momentum peak of early 2018 (as shown on Page 1 and the 2019 downturn the earrings level. The revisions rate continued to lead the ‘eamings lover until the upturn last year. PEPER E EE EEEESEESEESERIETEE Trailing and forward earnings yields starting to fall We willbe watching to see ifthe revisions rate ‘MSC ACW Tralng an Forward Ernngs Vela BARDOT ‘remains stable, increasing the chances that the trailing earings growth remeins above the ‘previous year's forward growth, oii instead ‘continues to fall with negative implications not only for earings growth, but also forthe level ofeamings. Inthe later case, valuations would worsen soon- corthan they would otherwise even without price ‘appreciation But the more likely outcome is ‘earnings stability with dropping earnings ‘momentum and rising disappointment, similar tothe setup for the market challenges n208 ‘As shown at lf the idle conditions of 2017 sent earings yields higher even asthe ACW! ‘reached record highs keeping valuation Te ee EE ae Te ‘concer inthe background and complacency TSa—aieintashtveasnasawerenarse Widespread. That left the market at risk in early a Steere ay wor ‘Simtsaimeraecsncsmsn” 2018 when valuations started to worsen atthe same ime that a global economic slowdown was geting started wth negative implications. ‘The market was vulnerable to disappoint- ‘ment in late2017 and early 2018 and that's Also ask for 2022 How equities respond to future earnings ‘news should also be influenced by interest rate trends. The 2021 uptrend in earnings Yields has improved relative valuations ver- sus bonds globally. Based on 43 markets, the ‘median spread between the earnings yield and the bond yield is 300 basis points even after the (October bond yield advance (right. bottom clip). The spread was also wide and rising in 2017, ‘and it continued to rise in 2018 due to market woakness instead of earrings strength. Then as ‘now, bond yields were trencing higher Cbelow, ‘middle clip) A difference today, however is that the 260-day correlation between the equity ‘benchmark and the global aggregate bond Earnings yields still much higher than bond yields ay nor Stock prices and bond yields now uncorrelated ‘Global Stock/Bond Veld Correlation Sepp tata DEAT TERRE yield has dropped to zero, ‘As 2022 progresses, we willbe watching the ex- tent to which the valuation gap narrows and the Correlation inverts. In the worst case, runaway inflaton and spiraling expectations would send. ‘bond yields sharply higher, closing the valua- tion gap and leading to an inverse correlation ‘between the aggregate yield and the colapsing ‘equity benchmark. That would be the back drop for a decisive cyclical bear market, potantaly raising the secular risks as well Inthe more favorable transitory infation scenario, the yield rise would be moderate ‘and tolerated by the market, as real economic {growth would continue to come through The valuation g3p would remain elatvely wide and the corelation would be flat or postive. The market risk would be limited toa reset of ean- ings expectations, the catalyst for increased volatility and potentially a shallow cyclical bear within the ongoing secular bull, That currently appears more likely than the worst One of aur expectations for next years that the gold uptrend wll persist, forthe reasons reviewed last week Yet even though gold has ben rallying since November, the US. Dollar Index has now broken tits highest levls since last summer, bucking the tendency for gold and the dollar to move in opposite directions. (Our short-term andlong-term technical com- posts have both returned to buy signa. And respecting the trend evidence, we aro moving ‘rom bearish to neutral. uw cout thst long-term uptrend is underway. The dola’s strength versus the euro may berated tothe relative case counts in Europe where new cases have been ising more apy than they haven the US. The chara ight shows that the EUR USD trend has generaly moved in tandem with EUR/USD moving with relative COVID cases in By nor Strengthening breadth among equal-weighted currencies the spread between new cases in the US.and Eurozone countries excluding rence due to ata issues), ‘The dolar also appears tobe responding to the risen US 10-year yield relative to non US yields in nominal terms. But the real yield

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