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Let's talk a little bit about where we
are with European equities, European

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equities have come a long way very
quickly.

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I think Friday we hit a bull market in
the stock, 600 amazing performance off

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the lows.
We hit the back end of last year.

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But the ECB is still banging away at
this idea that it's going to hike and

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continue to hike and then continue to
hike after that.

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Oh, those two thoughts on the same page.
And if so, if not, where is the gap?

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So the gap, I think, is that the central
banks are focused very much on the right

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policy that is designed to bring down
economic demand, aggregate demand, and

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that should eventually impact earnings.
But that's much harder to analyze,

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particularly for a global equity market
like the European equity market.

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But it also translates directly into
valuations.

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So on the positive side, we've had
reasonably robust economic data and

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surprises in Europe.
It's certainly been a much better winter

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than most people expected, and that's
very bullish.

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So the market has reacted to that and
pushed off valuations.

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And what the central bank is trying to
do is to remind people that actually

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leaning against that demand is a rate
hikes designed to mitigate some of that

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growth and bring earnings down as those
this tradeoff between valuations and

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earnings.
That's very difficult for investors

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right now given the rally that we've
seen has actually have equity markets in

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Europe, therefore, gone too far.
Yeah, yeah.

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We definitely think it's too soon to be
too confident.

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But we were in a place three months ago
where we when we look at our forecast

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distribution, where markets should be.
The market was at the low end of the

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distribution.
And simply what's happened is that

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through a little bit of positive
economic news, perhaps the hint of a

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pause in some of the rate hiking that
was causing valuations to be China,

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we've shot exactly a bit of trying, a
bit of energy prices, markets shot

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through what we think is the right
level, the middle of the distribution

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that we expect for this year and is now
sort of in the upper end of that

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distribution, a little bit overconfident
on valuations and a little bit lacking

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in caution for the potential damage to
earnings as we go through this year.

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Well, of course, one of those headwinds
to earnings potentially, Jerry, and it's

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Caylee in New York.
Nice to see you.

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Could be currency as we see potentially
the euro could gain more strength.

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If the ECB doesn't, it can indeed
continue on its hiking path.

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How do you factor that in?
Yes.

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And I've been speaking to investors
across Europe for the last few weeks.

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And and I think it is underestimated.
Investors got caught very off guard by

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the surge in European equities because
of the lower energy prices, also the

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China reopening.
That's caused a lot of rotation within

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the market.
What I think's being missed is this

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underlying slowdown in U.S.
demand and the commensurate change in

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the relative rate trajectory where
Europe is now hiking rates faster than

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the U.S.
and probably will be through at least

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the middle of the year before perhaps
you even get rate cuts in the US that

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are faster than Europe.
So, you know, the strength strengthen

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the euro.
We do expect to persist at the moment.

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There's obviously a little bit of
volatility because the Fed may end up

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needing to do a few more hikes after the
strong jobs number number on Friday.

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But if the euro starts rallying through
115 and towards 120 this year, that

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strong correlation of rising euro and
rising equities, we think we'll flip

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back to normal where a rising euro will
actually be a strong headwind for the

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profits in Europe.
OK.

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Taking all that into account.
Where does that leave European equities

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vs.
U.S.

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equities?
Because that's been the other big theme

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that has been running through markets
over the last couple of months.

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This outpouring of flows from the United
States into Europe.

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The last 10 years, we've seen European
equity markets massively

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underperforming.
Give us 60 bucks.

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We didn't have any tech next 10 years.
Do we see a more evenly balanced

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performance picture emerging between the
United States and Europe?

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We probably need to see where we get to
post Covid with the trying to us

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tensions to be talking about the whole
next 10 years.

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But even if we're just talking about the
next 12 months, keep Parker, our U.S.

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equity strategist, brilliant equity
strategist.

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You know, I actually have similar
forecasts for growth this year between

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the U.S.
and Europe.

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That is minus 10 to 15 percent,
basically.

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And that's unusual.
The last few years, the US outperformed

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because they had very strong growth that
Europe wasn't able to match up.

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But while we've got weak growth, a sort
of weak earnings expectations in both

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regions, the US, we think still cheapens
into the middle of the year, whereas

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Europe has already become cheap enough.
So the outperformance we're seeing from

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Europe we think is justified.
It's just that by the time we get to the

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middle of the year, we think the Fed
might be pretty close to cutting.

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And as soon as you get those cuts, the
market in the US that we think will be

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on a lower PE ratio by then should
bounce harder than Europe.

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So it's a little bit of a tale of two
halves where European outperformance we

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can justify in the short term, but
actually we think the US recovers very

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strongly in the second half of the year.
Gerry, I want to pick up on the China

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point, which you've alluded to a few
times now.

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There's the idea of a tailwind from
China reopening and that demand coming

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back fueling growth.
But then there's also the potential

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headwind of geopolitical risk.
Does one entirely offset the other?

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The geopolitical risk is much more long
term.

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I think what's happening in China tends
to be moderately important for the level

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of the European market, but it is much
more important for the rotation,

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particularly because what's being priced
at the moment is a consumption led

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recovery.
So we've had the consumer durables and

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apparel sector as an overweight
preference within Europe and they've

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really.
Lights out.

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They've done very, very well yet today.
In fact, they're one of the only sectors

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that has dramatically outperformed the
broader market in Europe, either trying

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to censor sectors like materials and
industrials.

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They're off, but they're just not up
much more than the rest of the market

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and reflecting that lack of Chinese
consumption growth.

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Okay.
Let's dig into that discussion a little

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bit more.
You say European equity markets are kind

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of swung from big over here to big over
here.

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We've gone from one into the other in
terms of the spectrum in which normally

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we would expect to be operating within
that.

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Though, the sector story, as you say,
has been rotation is important.

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The rotation is being hugely and has
been substantial.

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Where do you now see that rotation
going?

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We're going to rotate back towards the
defenses that have been performing very

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well today.
Health, healthcare, for instance,

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tracking sharply higher.
Yes.

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So too many strategists, I think, talk
about binary outcomes.

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We're in a downturn or we're in a
recovery.

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When we look at the probabilities in our
models, we're actually in a little bit

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of balance of both about 55 percent
downturn, regime probability and about

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35 percent recovery regime probability.
But actually recoveries can have strong

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upward momentum.
So we're in balance.

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I'd call it regime flux in 2023.
We're not expecting a strong recovery.

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We really need stimulus for that in
Western, a tight, tight environment.

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But in that balance, you need some
cyclicals to be long and some cyclicals

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to be short, some defensives to be long
and some defensives to be short.

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So for us, that means early cycle
cyclicals like banks, consumer retailing

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and semiconductors become our preferred
sectors.

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And the things we're a bit more cautious
about, a later cycle cyclicals like tech

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hardware in particular.
In addition to that, they're also very

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euro dollar sensitive.
And actually farmer is interesting one

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because it's very dollar sensitive.
It's our defensive that we think is

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going to be rather disappointing because
it's over owned and expensive.

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It's been underperforming already and we
think particularly because of its dollar

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sensitivity, that becomes a balance for
some of the defensive sectors that we

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would prefer to be long.
So a bit of a little bit of a balance as

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the regime shifts from downturn to
recovery all the way through this year

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without one totally dominating the
environment.