Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update. I want to share with you some thoughts about what we're seeing in the markets at the moment.

Now, it feels to me as though we spent a lot of the end of 2022 really thinking that good is bad and bad is good in the market context, meaning that new positive economic data was routinely received quite skeptically by investors, worried that it would indicate stronger inflationary forces that would necessitate even higher interest rates, and of course, higher interest rates are not good for valuations generally across the market.

That's changed now. And why is that? Well, I think it's because we've now only seen two months where U.S. inflation data has come in slightly better than the market's been expecting. And I think this is important because it's giving investors confidence to be able to predict, to say, that we may have seen the peak in inflation.

And if that's the case, then investors may be able to anticipate the peak in interest rates. And of course, when you see the peak in interest rates, it means that that negative headwind on the valuation effect from rising interest rates begins to be less of an impact, less of a negative dynamic for the asset class generally. So that's actually quite a constructive change, I would say, and we've spoken about in the past about the spread of outcomes being quite broad, it would actually signify, I think, a narrowing of the spread of outcomes, and that's going to be, as I say, a helpful characteristic.

But before we get too carried away about these positive steps that we're beginning to see, we should actually be somewhat mindful that there are new uncertainties emerging. And the biggest one of those is around, I think, the impact of what these higher interest rates, these tighter monetary conditions, are actually going to mean in terms of corporate profits. And we haven't yet seen that. You'll, I'm sure, many of you will be aware that many economists and strategists are talking about recession over the course of 2023. And it's true – it feels as though many consumers are already behaving as though there is a recession in practice, but we've yet to see that come through in terms of corporate earnings in a major or significant way. That probably still lies ahead of us here as we’re talking at the beginning of 2023, and this current earnings season coming up is going to be a really good guide as to think the severity of that profit downturn if and when it happens. So, investors, I think, are sort of looking, standing on the edge and looking down into the valley below and wondering how far down earnings estimates have to go before they see the floor of that valley.

If we look forward, though, towards perhaps the second half of the year, then hopefully by that stage earnings estimates will have found a floor. And if they find a floor, and that's also combined with the fact that maybe interest rates are beginning to show some signs of actually relenting, maybe we even might anticipate some cuts by the end of 2024, that could be a much more constructive environment, I think, for the asset class generally. And I would say this is actually where sort of the market consensus now is beginning to solidify, it’s quite a strong consensus. And it feels to me quite reasonable in terms of that division between 3 to 6 months of uncertainty around how corporate profits with a stronger second half to the calendar year.

But if you were to ask me about where the balance of risk is to that consensus, I think if you if you were to ask me that question last year, I would say it was fairly evenly biased. But today I'm more of the opinion that, if anything, the balance of risk is shifting more to the positive. And the reason why I say that is because companies themselves have opportunities to be able to take some of their own actions to protect their corporate profits. And we're beginning to see just early signs of that coming through from some of the early company reporting in the headlines we've been seeing in the newspapers, and even some of the conversations we've been having with companies too.

So good examples might be the news that many technology companies are now revisiting their cost basis and trimming some of the fat in the businesses in order to sort of reflect the change in economic circumstances. We're also seeing some signs that lower commodity costs, including energy costs, are now beginning to filter through into cost of goods sold. And that's also, I think, perhaps a positive dynamic. So, there may be a few levers that company management teams can pull in order to be able to try and protect profits. And so, it's possible that in some areas of the market, we might actually see some positive surprises relative to some quite cautious expectations.

And I think for us as fundamental investors, hopefully that's a positive dynamic that we might be able to benefit from, given that we spend a lot of our time trying to focus on great businesses with great management teams who have the ability to be able to efficiently execute and deliver operational excellence over the course of their business activities.

The other thing that we're paying close attention to is the risk environment, which we have seen being quite elevated over the course of 2022. Some of the more recent readings are not as bad as the ones that we have been seeing hitherto. So, some again, some green, some small signs of perhaps encouragement, because if we see an improving risk environment, that too will also, I think, help the asset class generally. And what we've seen historically as well is that an improving risk environment does tend to provide a more fortuitous environment for stock pickers too. It feels as though in those sort of circumstances, the macroeconomic uncertainty recedes and it allows the stock specific alpha to remerge.

I hope that has been have of interest, and I look forward to catching up with you again soon.