The US presents a different picture. While Chart 3: 12m Forward Price to Earnings (MSCI AC there are some signs of increasing pressure World) - Expect further downward revisions in 2023 on consumers, real data has yet to turn 25x downwards, and markets are some way off pricing in the sort of corporate earnings 20x downgrades that would reflect a full-blown recession. That leaves us with the risk of a 15x more dramatic drop in the S&P 500 next year 10x if growth slows suddenly. Nevertheless, small/ mid-cap stocks appear cheap relative to large 5x caps, which should present some opportunities. 2000 2005 2010 2015 2020 Meanwhile, growth stocks still look relatively 12m Forward PE Average +1 s/d +2 s/d expensive versus value stocks, with the -1 s/d -2 s/d valuation gap at historic highs. Source: Fidelity International, IBES, 15 October 2021. Note: Consensus estimates based on IBES MSCI Dollar strength World forecasts. Another potential risk for investors is further Investors should also monitor the trajectory of US dollar appreciation, which would continue China. Not only is it a big market in its own right to erode corporate earnings. Emerging but it was also among the first in and first out of markets have historically been especially lockdowns, and the first major market to show signs sensitive to changes in the greenback’s value of earnings fatigue. Its performance in the coming and US companies are not immune to these months may indicate how things will play out in headwinds as their offshore revenues begin developed markets. to shrink. The S&P 500’s foreign exposure is China is investible but investors around 30 per cent. For global equities, multiples will continue to need to be selective decline as discount rates rise. Corporate profits In China, monetary conditions are more and earnings will need to adjust further to accommodative with relatively low inflationary reflect the uncertain economic picture, which is expectations. The big question for the first months likely to persist near term. Valuations are likely of the year is whether the economy can start to come down further as companies publish to perform. Unlike Europe there is no energy annual earnings numbers and expectations in crisis, and our base case is for a moderate the first quarter. and gradual recovery of growth as the year 12 Investment Outlook Fidelity International