Scott Berg, Portfolio Manager of the T. Rowe Price Global Growth Equity Strategy, says the next equity cycle will be defined by five forces. While the past three years have been dominated by the swinging pendulum between growth and value stocks, the future will imply a stronger focus on stock specifics and companies that can grow and compound their earnings.
1. The end of US stimulus
- With developed market central banks tightening monetary supply, it is highly unlikely that we will return to a stimulus-driven world.
- The market is anticipating material interest rate cuts as we move into 2024, but it is unlikely to happen given the clear risks posed by rising prices.
- Despite the Fed aggressively trying to suppress inflationary pressures through the removal of stimulus and one of the fastest rate hike cycles in history, there remains ample liquidity to create asset price inflation.
- While the Fed appears committed to deflating the economy, its ability to manage inflation down in a smooth fashion may be tested in the next stage of the cycle.
2. Economic deceleration and a hard or soft landing
- The lack of synchronicity has been one unusual feature of the current market cycle. Despite the decelerating economy, wages have continued to rise, and consumption trends have remained solid. Additionally, labour market remains tight, despite the Fed trying to induce higher unemployment. This may mean more sticky inflation in the coming quarters.
- While the consequences of driving down inflation will potentially lead to lower economic growth, this has clearly become the Fed’s most favoured option when choosing between the rock and the hard place. However, the softer landing seen so far is acting as a soother for equity markets.
3. Deglobalisation and the China-U.S. decoupling
- The U.S. and China are decoupling on economic and political levels, implying more domestic investment as both parties try to build independent supply chains that were previously interlinked.
- The U.S. government is serious about building the required infrastructure to create independence, and that is why being on the right side of this change at a stock-specific level will be important.
4. Being on the right side of the AI investment cycle
- Recent quarterly results from companies like NVIDIA indicate that AI is attracting large-scale investment as well as competition for investment. The investment cycle for AI is still in its early stages. It brings tremendous opportunity but also requires careful consideration of durability and valuation.
- Positioning for the right side of the AI cycle is important given the magnitude of spending occurring at a time when many corporate margins are compressing.
5. End of the goldilocks era for corporate profits
- With the era of low interest rates, low taxes, low wage growth, cheap commodity prices, easy technological gains, and deflationary globalisation now passed, this will have implications for profit margins for all companies.
- Markets will increasingly reward those companies that can withstand an economic decline and maintain or expand profit margins.
By Scott Berg, Portfolio Manager, Global Growth Equity Strategy
