Recession not priced into stocks

Arguably, this is, even more, the case on the ASX which has ducked some of the selling as commodity prices rocketed. Global recession will crush those while the housing crash destroys domestic demand. If so, ASX has some catching down to do. Michael Wilson at Morgan Stanley.

With our view for lower multiples and earnings now more consensus, the markets are more fairly priced. However, it does not price the risk of a recession, in our view, which is 15- 20% lower, or roughly 3000. The Bear market will not be over until recession arrives or the risk of one is extinguished.

What do forward EPS contractions look like in the absence of a recession and during a recession?…Forward EPS contractions over 2% are fairly rare. During non-recessionary times, the median EPS contraction is about 5%. During recessions, EPS contractions ramp up to 14%. Such a decline would take the consensus of $239 today down to $206; putting a 14/15x trough multiple on this implies a price range of 2,900 to 3,100.

Given the macro turmoil of the past few weeks, we wanted to provide a screen of stocks where earnings are relatively insulated from this risk and have the potential to see upward revisions…We polled Morgan Stanley analysts to see where they had high conviction that earnings will be revised upward going into 2023- the results are show in Exhibit 7. These stocks are all rated overweight.

Where can equities trade in the event of a recession, and what is already priced?… Price action suggests that equities have already drawn down ~60% of the recessionary average. 2022’s price action is relatively similar to recent recessions in terms of leadership,albeit less severe in terms of magnitude.

With the risk of a broader consumer spending slowdown rising, we outline the industries/companies most and least at risk… Our newly-created heat map helps to frame the industry-level risk of slowing consumer spend inclusive of high-end consumption and shows that the Payments, Internet Retail,Leisure Products,and Media sub-industries appear to be less exposed to a slowdown in consumer spending today, while Specialty Retail, Multiline Retail, Textiles and Apparel,and Hotels, Restaurants & Leisure appear to be more adversely exposed.

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Comments

  1. Goldstandard1MEMBER

    People are so used to govs/central banks bailing them out, they have no idea what’s coming and thus, have continued the head in the sand high risk strategy. I mean when it’s worked for so long why change now? It seems they are about to find out…..

  2. MB readerMEMBER

    Given the Australian market has not increased over the past 15 years or so in the same way as the US markets, do you think that Australian stocks could fall another 20%?

  3. Finance MessiahMEMBER

    Of course not. The only reference point a lot of people have for terrible economic conditions is the 2008 Global Financial Crisis, save for the boomers who will tell you how terrible interest rates were in the early nineties (always conveniently leaving out how fast they fell and how quickly the worth of their properties went up). In 2008 we saw banks and financial institutions being run by clowns bailed out. Well, guess what? While things maybe have improved since then, the buffer we had going into 2008 is no longer there.

    This time we’re heading into an economic storm driven by more than greed. This time we see the consequences of almost a decade of poor economic management and financial institutions enjoying a prolonged period of stability.

    Our savings are being eaten by inflation. Now our superannuation is being eaten by the stock market. Fortunately, I have a few more decades until I retire, for some right now, they won’t be lucky if they were planning to retire in the next decade. What a mess.

    • kiwikarynMEMBER

      Just wait until those retirees start panicking and begin to pull their money out of super funds, preferring to hold cash in the bank because its “safe”, forcing the super funds to sell stocks en masse. My father is about to do this, he couldnt stomach watching his super balance go down month after month.

      • What is the impact of the weight of boomer money de-risking as the falls intensify? I reckon it’ll be huge and I’m seeing it daily. The self funded lot can now see 4% from 12 month term deposits, and many are already selling their second or third property plus half of their shares to rebalance and secure their retirement income.

      • Finance MessiahMEMBER

        I think this will be a bigger problem than people realise. Eyes are mostly on interest rates and inflation right now, but what your dad is doing is probably what a lot of people are considering as they watch their hard work and sacrifice taken from them. Just how much do super funds prop up the ASX? I don’t know the figures, but I would imagine collectively the $3.4 trillion in super at the end of March 2022, if even half of that is invested in Australian stocks and some of that money gets pulled, the current turmoil we are seeing is nothing. It will have an effect.

        The RBA is once again clueless. They are raising interest rates because it’s the only thing they can do. We only have to look at the storm brewing in the US and China to see that the inflation forecasts and talk of avoiding a recession are a lie. The US is fast approaching a recession (I keep seeing it referred to as a modest recession, whatever that means) and China has most likely technically already entered recession.

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