By Nick Hedley
As third-quarter earnings reports start to flow, private wealth managers are positioning themselves for disappointment.
“We still do not believe that earnings estimates have been revised to reality and we also believe that the multiples being paid for companies continue to be too high for the environment we are in,” Kasey Wopperer, co-founder and chief investment officer at Stone Creek Advisors, said in a note.
Supply shortages, including in the labor market, are fueling inflation, and a steep interest rate hike trajectory, therefore risks “cutting off demand completely while having only a moderate impact on inflation.”
Wopperer said Stone Creek Advisors is positioning client accounts to be more defensive. It is “very underweight” equities and is increasing allocations towards quality and defensive assets, including in the consumer staples, health care and utility sectors.
“We are at the bottom end of our allowable equity range and are likely to stay there until we see signals the economy has washed out and valuations are discounting reality, or the geopolitical environment greatly improves,” she said. On the other hand, Treasuries are starting to look “compelling.”
Eli Lee, head of investment strategy at OCBC’s private banking arm, Bank of Singapore, agrees, saying recent profit warnings could precede “intensifying earnings downgrades.”
Consensus earnings per share growth estimates remain too high at 7% for the S&P 500 index, Lee said in a recent note.
This is because of rising capital costs, a difficult environment for companies to pass on surging input costs, and the strength of the dollar, which will weigh on earnings generated outside the U.S.
And with inflation remaining sticky, the U.S. Federal Reserve’s “hands are tied from making a dovish pivot” any time soon.
“This means we remain broadly defensive in our asset allocation strategy given clear and present headwinds.
“It is important, however, to remember as we head towards 2023 that we are ultimately more focused on long-term upside than picking the market bottom for this bear market. As risk asset prices decline, the long-term risk-reward improve,” Lee said.
Asset prices could come under more pressure, but “more than half of the downside for this equity bear market has already been worked through at this point.”
Bank of Singapore is also underweight equities, particularly in Europe given the fallout from the Russia-Ukraine war.
But the private bank is overweight Chinese equities as “significant long-term value has emerged,” Lee said.
Meanwhile, some managers are still bullish.
“Despite the recent selloff, we're confident that these third-quarter numbers will be good,” South African private wealth manager Vestact said in a note. “That will surprise many, given the gloomy mood on Wall Street at the moment.”
Vestact manages client assets worth $500 million.