Six views on the global recession debate (and how it will affect Australian earnings season)

Our colleague David Thornton has penned a piece today on the bull case for avoiding a recession.

Macro

Think recession is a lock? Think again

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It comes fresh off a Goldman Sachs paper which argues that a severe downturn will be avoided in the Eurozone after all. The thesis of that particular paper can be summarised by this quote from Sven Jari Stehn and his team:

“We maintain our view that Euro area growth will be weak over the winter months given the energy crisis but no longer look for a technical recession.”

They went on to add that the Chinese reopening and the fall in natural gas prices means the ECB may be able to hike rates to just 3.25% - a long way from the 4.5% they once expected themselves.

Goldmans also thinks the US can achieve a soft landing this year, and equity markets seem to agree given the rally we have seen so far this year.

One person who does disagree with this view is David Bailin, CIO at Citigroup’s Global Wealth division in New York.

“A recession is on its way. We see signs of it appearing with greater clarity month over month. Thus, we expect more near term market volatility in the US as well as market corrections to return before anticipating a lasting recovery.”

So how will all this recession talk feed through to earnings, including here in Australia when reports come through next week? This wire will attempt to sift through the dialogue.

It’s not just the economy

Morgan Stanley’s Lisa Shalett argues that it’s not just an economic recession we need to be ready for - it’s an earnings recession too.

“Analysts expect company profits to grow about 13.5% this year. That seems high to us...”

Two weeks into Q4 earnings season stateside and we are already seeing that downward earnings revision in action. FactSet data reveals only two-thirds of companies (so far) have surpassed consensus expectations - and that’s in spite of how low expectations are particularly this time given the flow through of margin pressures. Before this reporting period, the FactSet consensus estimate called for a 4.6% decline. Morgan Stanley is predicting an 11% decline.

And before you all groan, remember - this is the same research house that practically nailed 2022 given it was the only group to correctly predict a fall in the S&P 500 by year-end.

Locally, Morgans is expecting an economic and earnings slowdown but no recession. Strategist Tom Sartor believes valuations have already come back a little but the pressure will remain.

“While valuations have come back materially, slower economic growth will keep earnings under pressure in 1H23. We don’t expect a typical recessionary slowdown in earnings but one more akin to a mid-cycle slowdown given the strong starting point for developed market economies (employment, household savings). China’s COVID policy ‘pivot’ will also temper downside risks.”

Last month, the broker upgraded its views on tech and consumer discretionary stocks while downgrading the agriculture space which had a big 2022.

Local implications

Ahead of February reporting season, the research houses are divided on how much Australia’s economic fortunes will affect earnings. Citi, for instance, has a very bullish target of 7% (yes, really) earnings growth.

“Our bottom-up Citi expectations are for 7.0% earnings growth for the market in FY23e. Banks sector earnings are expected to remain buoyant with 22.7% growth for FY23e (15.9% for Consensus). Resources sector earnings are expected to decline by -2.8% in FY23e (-2.9% for Consensus).”

That’s pretty punchy given the starting point was already strong for the Australian equity market. Some of its most preferred names include Brickworks (ASX: BKW), Coles (ASX: COL), Fletcher Building (ASX: FBU), Goodman Group (ASX: GMG), Imdex (ASX: IMD), and ResMed (ASX: RMD).

In complete contrast to Citi’s 22% target, Macquarie Group argues a bearish stance on the big banks ahead of earnings is not unreasonable.

“We believe an underweight sector call isn’t controversial until valuations are considered. The sector doesn’t appear expensive relative to industrials that arguably present greater near-term earnings risk.”

Only one bank (ANZ ASX: ANZ) is rated anything but an underperform by Macquarie, suggesting the Big Four are as expensive as ever. In the resources space, Mineral Resources (ASX: MIN) was recently upgraded to become one of the broker's top picks across iron ore and lithium joining BHP (ASX: BHP) and Pilbara Minerals (ASX: PLS) respectively.

We’ll all find out which brokers were right when February reporting season kicks off next week. Our coverage kicks off with REA Group on February 2nd. 

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