INVESTMENT OUTLOOK FOR 2023 - 14 - wilting housing market on growth, and we are now having the additional impact of sticky and rising housing rents on services inflation. This increasingly fragile macroeconomic environment seems profoundly disconnected with relatively optimistic corporate earnings expectations. As a result we are neutral on equities, but with a deeply cautious view on Europe balanced by more optimism towards China and Japan. While equites delivered double-digit total return losses in 2022, and valuations cheapened from January 2022’s lofty highs, losses would have been steeper were it not for expectations of positive earnings growth for 2022 and 2023. This increasingly fragile macroeconomic environment seems profoundly disconnected Earnings expectations are at best a coincident indicator, but they are too high for the macroeconomic setting just described. We have several frameworks for thinking about where earnings and valuations should be at different points in the cycle. With the exception of Asia and, more recently the US Nasdaq index, our research points to further falls to come — from both lower valuations and earnings — before we reach fair value. Lastly, geopolitical risks pepper the investment horizon. This is something we will monitor closely in 2023. The evolution of the Ukraine war and the energy crisis; China’s approach to Taiwan and the reopening of its economy; trade wars and their impact on supply chains – each of these developments could alter the path of both cash flows and discount rates. With no quick resolution in sight, risks here are likely to remain elevated. Exhibit 4: Some markets are very mispriced Gap in EPS and PE vs. model 50 PE gap EPS gap 50 40 Misprice (%) 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 MSCI MSCI MSCI USA Nasdaq MSCI MSCI EMU MSCI UK MSCI MSCI -30 World AC World 100 Europe Japan Emerging (USD) (USD) Data as at 24 Oct. 2022. Sources: Bloomberg, BNP Paribas Asset Management