New Bond News Gives Green Light for Equity Investors

In the US, the historically strong growth indicators still cannot yet tell us whether the current pace can be sustained or even will accelerate further. What we can tell is that equity analysts have recently upped 2021 full year corporate earnings estimates sharply but have been more cautious for 2022. Those are barely changed since the start of the current quarter.

What analysts around the world have been doing is increasing their longer-term (generally three- four years’ hence) estimates. Indeed, research provider Factset’s aggregates of longer-term growth projections are uniformly at the strongest levels since the start of the data in 2001. Where longer-term forecasts are concerned, analysts tend to follow markets rather than lead. In other words, one can see the high corporate growth levels as needed to justify current market levels. There is another way to read it: analysts tend to underestimate earnings rebounds, especially during strong economic growth periods, and these longer-term projections are perhaps signalling only that analysts expect to upgrade nearer-term earnings.

For us though, we continue to be marginally more focused on geopolitical rumblings. US president Biden’s ramping up of sanctions on Russia this week, which were expected by political insiders, were imposed after the hacking of the US cyber security and software company SolarWinds last year. The sanctions themselves are more damaging for Russia than the Skripal poisoning sanctions imposed by Trump in 2019, but are small in comparison to the benefit that Biden’s fiscal boost brings for oil prices, and hence Russian oil revenues.

Nevertheless, it signals that Biden understands his international adversaries are trying to test his mettle, and whether he is as much of a foreign policy dove as he apparently was while part of the Obama administration. This week’s demonstration of a clear willingness to impose consequences on harmful actions might give those adversaries their answer. With China literally and figuratively pushing its boundaries, and Russia following suit with its military build-up at Ukraine’s borders, Biden’s sanctions are perhaps a warning shot in that direction as well.

We are not expecting a repeat of events like the Crimea annexation, but beyond the testing of Biden’s foreign policy stance, some see Russia’s actions as pointing to a weakening in Putin’s popularity, with elections of sorts not too far away. The Putin of 15 years ago may have calculated that Russia’s best interests involved a quiet tactical retreat. Older leaders tend to prioritise more personal incentives towards their legacies, which can lead to more erratic outcomes. This might particularly be the case here, if last year’s speculation about Putin’s health has some basis.

We still do not think this will end badly, or that markets will react negatively if tensions between the US and Russia worsen. It is in neither side’s interests to push their actions to the point of no return. Putin will probably continue with all multilateral engagements – such as the online Earth Day Summit that Biden is convening next week (which, it seems, Xi Jinping of China will also be taking part in). His contribution will be closely watched. The Russians have said they will delay a bilateral summit with Biden and have threatened to pull out, but political analyst Christopher Granville of our research partners TS Lombard thinks Putin will probably engage.