00:00Bond market sell-off is not necessarily bad for equity markets, for the index level.
00:05Equities, half of the time of this type of level of sell-offs in the bond market have been up.
00:11But what determines whether they go up or down are two variables.
00:17Number one, what is going to happen to inflation?
00:20It's irrelevant of the level. It's about the deltas.
00:24Is inflation going to be higher over the next three to six months or lower? That's number one.
00:30And number two is PMI, so economic growth.
00:33If PMI starts rolling over, that triggers or could trigger or historically have triggered a sell-off in equity markets,
00:41right?
00:42But are you expecting a kind of sell-off or a correction in equity markets?
00:46So if you believe the bond market's right because of the inflationary dynamics and stagflation, then equities are mispriced.
00:53So equities have rallied a lot in the short term, of course.
00:57So from that perspective, investors are worried that perhaps it got overheated in the short term.
01:02However, if you look what is happening on the earnings front and the parts of the market that are actually
01:08driving the index level,
01:10they are doing pretty well, right?
01:12We've been seeing an explosion of earnings in the last reporting season.
01:18So from that perspective, I don't see risks.
01:20And let's not forget about snarowness of the market.
01:25Not everything is going up the way the tech and AI is going up, right?
01:29So the market is more cautious on some particular parts of the market exposed to higher inflation or higher oil
01:36prices.
01:36Beth, where are you expecting equity markets to go?
01:39And again, you know, Europe is, I guess, disproportionately compared to the U.S., much higher impacted by the price
01:45of oil.
01:46Even if the war stops tomorrow, which is unclear the path forward, there's going to be ramifications, maybe oil at
01:52100 until the end of the year.
01:54Absolutely. So from the preference that we've had for over a year of the rest of the world equities over
02:00the U.S.,
02:01we've changed it earlier in the conflict to the U.S. versus the rest of the world because there are
02:07no miracles, right?
02:10Economies and parts of equity markets exposed to higher energy prices will see downgrades and we are already starting to
02:16see them.
02:17Now, so a bit more cautious stance on the cyclical part of the market.
02:22Having said that, I haven't changed the target for Europe and we haven't changed the EPS growth. Why?
02:29Because actually, while some parts of the market are seeing downgrades to the EPS, you're seeing this explosion of earnings
02:38in energy.
02:39Now it accounts for over a third of EPS growth in Europe.
02:42Actually, EPS growth in Europe for the index level is going up, not down, but it's happening in this very
02:50narrow fashion, right?
02:52So index could still move higher, 5% upside.
02:57Earnings level could be okay, but it is with a very different composition than what was expected at the start
03:05of the year.
03:05So indexed.
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