The Height Capital Investment Committee met last week to discuss our views on markets. The discussion was around forecasting from analysts and expected earnings guidance. The decision was, analysts are still factoring in strong earnings growth to remain the same as the past 12 months, which the committee disagreed with, and decided to build out the following modelling.

The Investment Committee consensus was:

• The US and Australian markets with the latest rally are overpriced, and earnings estimates are likely to fall by 13%. This view is based on the following:
  • Cost of capital increasing by 5% will lead to a fall in earnings by a similar amount.
  • Labour shortage will place long term pressure on most companies. The cost of this is about 3% of earnings across the market. The real issue here will be long term.
  • Trading conditions and inflation. The US and Australian markets are very much under stress from inflation, with input costs increasing and we’re likely to see a slowdown of demand. We are likely to see this effect earnings by another 5%.

We are not convinced that we will see the PE adjust from the current long-term average, but it will be volatile. We believe some form of underperformance in earnings will reset some of the Price to Earnings Ratio figures below the long-term averages. In addition, the higher cash rates will see the Price to Earning Ratio fall in the short term while the market comes to terms with the adjustment of earnings. Based on this view, we have created the following market analysis and estimates.

ASX 200 market

The overview is that when earnings are reported in February, we are likely to see revised numbers, and a market adjusting down which will see the market correct to 16x future earnings. Based on our view, we see the midpoint as outlined in the attached table of between 6,700 and 6,371.

The current long term trend regression line is approximately 6,790 and we would expect the market in Australia to fall below that line given the current economic outlook.

US Market

The overall market is factoring in a soft-landing recession, if that’s the case, we are likely to see inflation stay for longer and rates to increase above the current market expectation. That would lead to another market correction as the risk-free rate will increase substantially.  

Height Capital’s View is that the US market is 17% above the long-term trend and will pull back closer to 3,400 – 3,200 depending on the news of the Federal Reserve stance in the short term. We believe the long-term trend at 3,200 is likely where we would start looking at US investments again.

In our view, markets still have a bit to fall before investing. Height Capital have a number of investments that we are researching to be placing capital to work when these levels are meet.

If you would like further information regarding this analysis or to discuss how this may impact you, please contact our office 1300 935 339.