It’s been a difficult year for markets as investors grapple with a strong US dollar, stubbornly high consumer prices and the prospect of prolonged rate hikes. “The market background is very much dominated by central bank actions and what appears to be increasingly hawkish rhetoric. It will be the trajectory of inflation, how central banks react to it, that will dictate the path of markets in the short and medium term,” Neil Veitch, investment director at Edinburgh-based SVM Asset Management, told CNBC Pro Talks last week. He believes the macro landscape will remain “quite difficult” for the remainder of the year. “We have a lot of uncertainty about where inflation could end up into 2023 and how central banks will respond. We have third quarter earnings in front of us. I think we’ll be fine, but as we’ve seen with companies like FedEx, where they may have overearned during the pandemic, some significant adjustments to forecasting may be needed,” he said. Veitch believes the market will become “more constructive” in the first quarter of 2023 — though he thinks earnings estimates need to be lowered first. “I think earnings will be the driving factor in the short-term and right now any kind of downside surprise is being severely penalized by the market. That’s the typical pattern of behavior in a bear market – short-termism and negative momentum dominate,” he added, echoing comments from a number of market watchers who have long warned that earnings estimates remain too high. Inflation also needs to fall significantly — below 4% — before the Fed slows its current rate of tightening, Veitch said. Buy dip? So how should investors position themselves against this backdrop? While Veitch warned that “there are a lot of moving parts” and indicated that he would remain “tactically cautious,” he also sees opportunities to buy the dip. “With stocks that are down 50% in many cases and trading in the high single digits or low double digits price-to-earnings multiples, they’re starting to look more attractive, even allowing for the risk of further earnings downgrades,” Veitch said. “It might be a little early to pull the trigger for shorter-term money, but if you have a medium-term perspective, I think some of these companies are going to discount a lot, and eventually we’ll come out the other side of this, when.” “Wherever that’s the case, you’re in a better, stronger position,” he added. Growth, value, or both? Veitch also chimed in on one of Wall Street’s most important debates — the battle between value and growth stocks. He favors one Barbell approach and likes US consumer giants that are “de facto monopolies” as well as “classic value, early-cycle companies” like select retailers, which he believes would react positively if the Fed starts raising its rate pace slowing hikes.”Again, it will all be about stock selection. There’s no point in picking retailers across the board. We have to try to capture the mid-term.” understand the dynamics and their long-term earnings potential,” he said. Within the growth space, he thinks some FAANG stocks like Alphabet are attractive over the medium term.
