The market has swung between fears of inflation and concerns over the economy slowing. But—assuming no escalation in geopolitical conflict—global inflation should be near its peak. Risk to earnings forecasts is now the key focus, as high interest rates may persist. Thus, earnings visibility will take center stage, we believe. We prefer the following plays: 1) post-COVID normal-ization, 2) tourism revival, 3) defensive growth plays, and 4) 3Q22 earnings plays (revenue visibility and price discounts).
Too hot versus too cold
The market has largely priced in inflation, we believe, and has shifted focus to the risk of recession. Global inflation has either peaked or is near-peak. Crude oil prices at end-Aug were down 26% from their Mar peaks and the FAO Food Price Index has decelerated (up 8% YoY in Aug versus a 34% YoY jump in Mar). Although the cost of shelter in the US is still rising, its labor market started cooling in August. In quarterly terms, US headline inflation probably peaked in 2Q22; we expect headline CPI to peak in Thailand in 3Q22 and the EU in 4Q22.