A more cautious stance on equities

Indeed, emerging markets have historically been more sensitive to tighter US monetary policy, and the US Federal Reserve (Fed) has expressed its intention to start tapering its USD 120 billion monthly purchases from November this year, probably by USD 15 billion a month. This means that, although markets remain firmly supported through the generous provision of liquidity, it is inevitable that the huge pool of policy support will shrink.

Also, we believe that the other engine that has driven stocks to all-time highs – namely, earnings – may well sputter in the fourth quarter. Input price pressure is hitting both industrial and consumer companies’ profit margins. This is illustrated by the gap between producer price indices (PPIs), which reflect input prices, and consumer price indices (CPIs), which reflect output prices.

Meanwhile, the strong upward revisions to earnings forecasts seen over the past year seem bound to gradually fade. The upward momentum in earnings-outlook revisions has continued to be strong across the world, with only two downgrades for every three upgrades. We haven’t seen such numbers since 2004. However, our view is that this trend is unlikely to be sustained, as we see slower economic growth and margin pressure ahead.