What contributed to September’s unintended volatility and macroeconomic shifts? Jeremy Richardson discusses rising interest rates, a slowdown in the global macro economy and concern around the profit forecast; three factors weighing on investors’ minds as we head towards the Q3 earnings season, and management teams weigh up their expectations for 2023.
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Hello, this is Jeremy Richardson from the RBC Global Equity team here with another monthly update. Now, we might have been hoping for a quiet month, but it doesn't look as though we've got one. And not only was there a significant profit warning from FedEx, which hinted at a slowdown in the global macro economy, but more recently, we've seen interest rates begin to motor.
US 30-year mortgages; the average mortgage is now around 7%. And we've seen the yield on the US ten-year treasury knock on the door of 4%. In other parts of the world, we're seeing similar levels of interest rate increases, notably in the UK in response to the market's reaction to a budget event by the UK government. But also in continental Europe, where spreads of Italian ten-year debt above Germany are now over two and a half percent. What is contributing to all of this? Well, a part of it is a be traced back to the strength of the US dollar, the fact that US interest rates have been moving further and faster than elsewhere in the world, contributing to this relative US dollar strength. And this has an impact for investors generally on two levels. Firstly, because of the level of the discount rate, with interest rates rising, and that acts as a valuation headwind across the entirety of the market But more perhaps in the short term, there's also impacts upon profits. And if you think about a discounted cash flow it’s that numerator and denominator. Both of those two parts of the equation need to be resolved by investors when they try to look forward and make forecasts. And I think it's the concern around the profit forecast, which is now beginning to weigh increasingly on investors’ minds as we head towards the Q3 earnings season, in particular what management teams may be saying to investors about their expectations for 2023. So far, as we are talking to company management teams, the majority of them feel relatively comfortable. But I'm conscious of the fact that a turning points’ visibility does become clouded. And so, with the passage of time, I think investors will continue to be paying very close attention to any indication that the profit outlook may become impaired. For stock pickers like ourselves, you know, this focus on macroeconomic factors, shifts in interest rates and currencies is a lot of very unwelcome noise because it does distract investors’ attention away from company fundamentals. And it's times like these where robust portfolio construction really comes to its own, helping to dampen down some of the unintended volatility. I hope that's been of interest and I look forward to catching up with you again soon.