A US recession is highly likely, but it will be shallow and provide compelling valuations for global equities investors, says Pendal’s ASHLEY PITTARD

• US recession is highly likely but should be shallow
• Invest through it with 2022 losers such as Amazon and Netflix
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

A US recession is likely this year – but won’t be as bad as previous downturns, ironically because of Covid and the deterioration of global trade flows in recent years.

That’s the view of Pendal’s head of global equities Ashley Pittard.

“It’s highly, highly likely that there’s going to be a US recession this year,” says Pittard.

“But there’s a difference this time around because of robust capital expenditure. It’s clear this recession is going to be shallow.”

“Yes, we are going to have a recession – but so what? Invest through it, because valuations are compelling.

“There’s been a de-rating of the market and we are going to have earnings growth when we get out of this downturn.

“Inflation has peaked and is on the decline and the Fed is nearly finished raising rates.”

Onshoring drives economy

Breaking that comment down, Pittard says the trend towards onshoring of manufacturing in major economies, including the US, is driving economic activity.

Onshoring is a direct result of the disruption of trade flows — firstly from a deterioration in international relations between major players such as the US and China, and secondly from Covid-induced shutdowns to shipping.

Find out about

Pendal Concentrated Global Share Fund

Read more

Add in big tax incentives from Washington — particularly for infrastructure and manufacturers via the Inflation Reduction Act of 2022 — and there’s plenty of reason to think some sectors of the US economy will do well, Pittard says.

“Just look at what’s happened in 2023 so far – the market is up 5 or 6 per cent,” Pittard says.

“Why? Well markets pre-empt. Investors are saying there probably will be a recession around the middle of the year.

“But by that time the Federal Reserve will have stopped raising interest rates. All the news about the recession the market already knows — and so has priced it in.”

Earnings decline priced in

Knowledge is flowing through in earnings estimates for 2023, which forecast a fall in income of somewhere between 4 and 10 per cent.

“Let’s say the average is 7 per cent or 9 per cent if you strip out energy,” says Pittard.

“The market has already taken all that into consideration. Right now, on a price-to-earnings multiple, the market is very close to the long-term average.

“Investors are saying ‘yes, earnings will be down’ …. and they’ve brought the PE multiple back four points, from 21 to 17 points.

“But once we get through a mild recession our earnings growth on a three-to-five-year horizon should be pretty good.

“That’s because of capital expenditure. It’s also because of the unemployment rate which is around 3.5 per cent. Even if it went to 6 per cent, that’s still historically low.

“And wages growth is averaging 5 per cent and it’s not going away. Meanwhile, supply chain inflation is reducing, and commodity inflation has declined dramatically.”

What it means for investors

The obvious question is: ‘where should investors be thinking about putting their money?’

“Last year we were pushing the Covid losers – financials and energy — and they’ve done very well.

“Going forward you still want some of those names, but also you need some of the 2022 losers.

“Names like Amazon, Netflix and other media streaming assets. You’ll want to be fully invested.

“You want to have Covid losers plus selective 2022 losers.”

Why bonds, why now

Ausbiz’s Nadine Blayney interviews CBA chief economist Stephen Halmarick and Pendal head of bonds Tim Hext

ON-DEMAND WEBINAR

Watch Now

About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here.