[Editor’s Note: Julian McCormack is presenting at the upcoming ASX Investor Day on this topic. To learn more, register for ASX Investor Day].

In Platinum’s view, global equity markets may prove challenging for the foreseeable future. Ironically, we think China may prove a source of stability for global equity investors. 

Platinum is concerned that the United States is headed into a recession, possibly a deep one. We are already witnessing a significant fall in US corporate profits, and we would expect that to continue in the coming months. 

This might sound like consensus thinking, but consensus earnings expectations in the US are for basically no fall in S&P 500 earnings-per-share in 2023 - and strong earnings growth in 2024 and 2025. 

We are seeing a strange phenomenon: US equity markets are bidding up highly cyclical sectors like trucking operators or steel makers as if a recession has already occurred. It has not. 

In Platinum’s view, US earnings expectations have to come down significantly to match reality before there is any sense in buying early-stage cyclicals, or indeed much of the US equity market. 

[Editor’s Note: Do not read the following analysis as a recommendation to sell US equities and buy Chinese equities. Talk to your financial adviser or do further research of your own before acting on themes in this article. Global investing involves currency and other risks, and Chinese equities, in particular, can be volatile].

A summary of the indicators that Platinum highlights to support its bearish view for US equities is:

• Consensus market expectations for earnings growth in the US are up 6% for the next 12 months, which is one of the slowest rates of earnings growth in the developed world. Yet investors are paying over 18 times (average PE multiple) for these earnings, making the US the most expensive developed market globally (source: MSCI and Credit Suisse, respectively); 
  
  
• The US money supply is currently shrinking, as measured by M2, which is unprecedented in data going back to 1960, and we would guess that this is the deepest contraction in inflation-adjusted money supply since the Great Depression in the US (source: Bloomberg); 
  
  
• Future credit standards as measured in the US Federal Reserve’s Senior Loan Officer Opinion Surveys indicated a recessionary level of credit tightness before the collapse of Silicon Valley Bank, and we would expect the events of March to aggravate credit tightening going forward; 
  
  
• Year-to-date (31 March) rail freight volumes in the US are at their weakest since 2011 (source: Bloomberg); 
  
  
• US truck freight rates have fallen by over 12% from mid-2022 to 31 March, a fall consistent with the 2008 recession (source: Cass, FactSet);
  
  
• US retail sales appear to have slowed steeply in 2023, with annual growth falling from 5% in January to 1% in mid-April, according to the Redbook Index, which is a level in line with sales growth in early 2008 (source: Redbook, Bloomberg).
  

We could go on. But Platinum reiterates the outlook for US equities is poor. 
 

A steady if unspectacular re-opening in China  

Meanwhile, China is in a different position altogether. After years of disruption from strict COVID-19 policy enforcement and regulatory crackdowns, China is reopening. 

Platinum believes this is unlikely to be anything like the roaring reopening of the West, but it is equally unlikely to lead to an inflationary hangover like that which now confronts the West. Consider the following:

• Chinese money supply growth has remained muted in recent years, gravitating between an annual rate of 8% at its lows in 2018 and its March 2023 reading of 12% (source: Bloomberg). The US M2 money supply saw a peak of 27% in 2021 and was negative 2.4% in February; 
  
  
• Chinese rail freight volumes have seen steady growth since a deep slowdown in 2016 (source: Bloomberg); 
  
  
• After huge volatility in recent years amid the COVID-19 lockdowns, Chinese power demand was once again growing at 5.9% year-on-year in March 2023 (source: Bloomberg); 
  
  
• Chinese inflation peaked at 5.2% in 2020 and has moderated to just 0.7% in March 2023 (source: Bloomberg); 
  
  
• Having been negative month-on-month from late 2021 to late 2022, Chinese new-build residential apartment prices are once again rising, posting a robust 0.4% increase in March 2023 versus the prior month (source: Bloomberg); 
  
  
• Retail sales, which once again have been wildly volatile for years, posted a 10.6% increase in March 2023 (source: Bloomberg). 
  

Conclusion

Platinum believes China appears to be aiming for a measured, perhaps even boring, reopening. 

In a world where many countries are dealing with the highest inflation rates in decades, equity valuations are high and corporate profit margins are near all-time highs, we believe the approach of China may prove a welcome respite for investors.

DISCLAIMER

This article has been prepared by Platinum Investment Management Limited ABN 25 063 565 006 AFSL 221935 trading as Platinum Asset Management (“Platinum”). While the information in this article has been prepared in good faith and with reasonable care, no representation or warranty, express or implied, is made as to the accuracy, adequacy or reliability of any statements, estimates, opinions or other information contained in the article, and to the extent permitted by law, no liability is accepted by any company of the Platinum Group or their directors, officers or employees for any loss or damage as a result of any reliance on this information. Commentary reflects Platinum’s views and beliefs at the time of preparation, which are subject to change without notice.  Commentary may also contain forward-looking statements. These forward-looking statements have been made based upon Platinum’s expectations and beliefs. No assurance is given that future developments will be in accordance with Platinum’s expectations. Actual outcomes could differ materially from those expected by Platinum. The information presented in this article is general information only and not intended to be financial product advice. It has not been prepared taking into account any particular investor’s or class of investors’ investment objectives, financial situation or needs, and should not be used as the basis for making investment, financial or other decisions. You should obtain professional advice prior to making any investment decision. Historical performance is not a reliable indicator of future performance.