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As the sun sets on summer, so do hopes of an end to macroeconomic uncertainty. A U.S. recession remains a distinct possibility as the Fed continues to tighten monetary policy, geopolitical tensions are fuelling concern for Europe’s energy security, and supply chain and climate issues continue to impact both Europe and Asia. According to Jeremy Richardson, now is the time for strong balance sheets, and for companies with strong operational execution.
Watch time: 3 minutes 19 seconds
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Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another monthly update. And as the summer comes to a close, it feels as though we are living through a change of seasons.
At the beginning of August, I think there was a sense that the market was looking for a soft landing from the US economy. Those hopes seem to be somewhat dashed now given that we've had the Chairman of the Richmond Fed saying that U.S. policymakers will do whatever it takes in order to get U.S. inflation down, and then Chairman Powell, in his Jackson Hole speech, saying that they will keep at it until the job is done.
This raises the prospect of even tighter monetary policy in order to squeeze inflation out of the system and raises the prospect, I think, of moving from a soft landing to something which we might describe as being sort of a harder landing in nature.
And this is important because the question of whether there will be a recession in the US, which everybody was wondering about in terms of the Q2 earnings season, was left largely unresolved by what companies were reporting. Generally, the Q2 earnings season went fairly well and there were not the widespread downgrades that investors feared.
However, that doesn't necessarily mean that that issue, that question, has been resolved to investors satisfaction. Arguably, it's just been pushed out by the central bankers’ comments to the next quarter, and potentially even towards the year end before we get resolution of this major uncertainty.
So, it feels as though actually, as I said, there's been a change of seasons. We're seeing that a little bit being played back to us in terms of the response that we utilise - having seen a gradual and steady improvement over the course of the early part of the summer, that improvement now seems to have stopped and actually giving back a little bit of ground. So, the environment seems to be deteriorating once more.
And so, with the prospect of still geopolitical uncertainty, Chinese-Taiwan tensions, concerns over energy security in Europe, Russia supplies to Europe as we speak are once more interrupted and likely to remain so for much of September if plans are to be believed, and concerns over the smooth operation of supply chains given climate change pressures on the River Yangtze and River Rhine, in China and Europe respectively, and also the continued disruption from COVID, particularly in the Far East.
And this, I think, gives investors sort of cause for reflection and it's probably not a time for stories, it's probably a time for strong balance sheets, for companies with strong competitive advantage and with strong operational execution. I think those are the sorts of things that we're thinking about, in particular with respect to identifying stocks at present.
I hope that's been of interest, and I look forward to catching up with you again soon.
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