By Nick
Hedley
As
third-quarter earnings reports start to flow, private wealth managers are
positioning themselves for disappointment.
“We still
do not believe that earnings estimates have been revised to reality and we also
believe that the multiples being paid for companies continue to be too high for
the environment we are in,” Kasey Wopperer, co-founder and chief investment
officer at Stone Creek Advisors, said in a note.
Supply
shortages, including in the labor market, are fueling inflation, and a steep
interest rate hike trajectory, therefore risks “cutting off demand completely
while having only a moderate impact on inflation.”
Wopperer said
Stone Creek Advisors is positioning client accounts to be more defensive. It is
“very underweight” equities and is increasing allocations towards quality and
defensive assets, including in the consumer staples, health care and utility
sectors.
“We are at
the bottom end of our allowable equity range and are likely to stay there until
we see signals the economy has washed out and valuations are discounting
reality, or the geopolitical environment greatly improves,” she said. On the
other hand, Treasuries are starting to look “compelling.”
Eli Lee,
head of investment strategy at OCBC’s private banking arm, Bank of Singapore,
agrees, saying recent profit warnings could precede “intensifying earnings
downgrades.”
Consensus
earnings per share growth estimates remain too high at 7% for the S&P 500
index, Lee said in a recent note.
This is because of rising capital costs, a difficult
environment for companies to pass on surging input costs, and the strength of
the dollar, which will weigh on earnings generated outside the U.S.
And with inflation remaining sticky, the U.S. Federal
Reserve’s “hands are tied from making a dovish pivot” any time soon.
“This means we remain broadly defensive in our asset
allocation strategy given clear and present headwinds.
“It is important, however, to remember as we head towards
2023 that we are ultimately more focused on long-term upside than picking the
market bottom for this bear market. As risk asset prices decline, the long-term
risk-reward improve,” Lee said.
Asset prices could come under more pressure, but “more than
half of the downside for this equity bear market has already been worked
through at this point.”
Bank of Singapore is also underweight equities, particularly
in Europe given the fallout from the Russia-Ukraine war.
But the private bank is overweight Chinese equities as
“significant long-term value has emerged,” Lee said.
Meanwhile, some managers are still bullish.
“Despite
the recent selloff, we’re confident that these third-quarter numbers will be
good,” South African private wealth manager Vestact said in a note. “That will
surprise many, given the gloomy mood on Wall Street at the moment.”
Vestact
manages client assets worth $500 million.
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