Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 472

Three factors shape whether we are at the bottom yet

The rapid increases in global interest rates this year came as a shock to many investors. While the interest rate setting for the world was way too low last year, it was also completely understandable. It seems nobody, including central banks, had anticipated how quickly economies would recover from Covid-19.

But once they did, spending rose and demand, combined with tightening supply for many goods, pushed prices up and necessitated the rapid increases in rates.

The good news is that we believe markets have now fully priced in interest rate hikes. The bad news is the majority of earnings downgrades are probably yet to come.

As investors we need to respect the history of bear markets - and the history of bear markets is they are normally worse than this. But there are still opportunities in this environment if you know where to look and we have been deploying cash even as we wait for earnings downgrades to play through.

The outlook

When considering whether ‘we are there yet’ in terms of reaching the market bottom, we believe there are three important factors to consider.

1. Interest rates

When interest rates rise, the price of everything generally falls. The multiple then comes out of the market and growth assets usually get hit first, which is what we saw in January 2022. Falls in other asset prices, such as housing and private equity, followed.

We think the market is now adequately pricing where cash rates have to reach, which is roughly 3% in the US and Australia. This is apparent from the bond market where short-term rates are still rising but long bonds are not, and the yield curve is inverting. The bond market is telling us that 3% is enough to get the desired outcome of slowing the economy.

2. Earnings

You cannot have interest rates rise at the speed at which they have and not have people and investors change their behaviour and spending decisions. Earnings downgrades in this environment are a function of factors such as over-ordering and subsequent discounting of inventory, and general falls in asset prices.

So, while we might be there on interest rate expectations, we are certainly not there on earnings downgrades which have just started and which we expect to continue for potentially the next two quarters.

Source: Munro Partners

3. Time

The other factor to include when considering if 'are we there yet' is time. The average bear market lasts 12 months and falls approximately 37%. This one has lasted eight months and has fallen about 27%. That is in the realm of an average bear market. But we could be in a mild bear market, an average bear market or it could be a bad bear market. Only time will tell.

In terms of those three things that we are looking for, we can tick off interest rates as peaking, earnings downgrades as just beginning, and when it comes to time, we could potentially only be halfway there.

What to do about it?

The market is forward looking so investors don’t have to wait for earnings to bottom before the market bottoms. Interest rates peaking is the most important factor. Earnings downgrades are harder to price. But at some point, in the next quarter or two, you'll be able to see the other side of the valley and the market will just move on.

If we are in an environment where interest rates have peaked but earnings deratings are occurring, then companies with more resilient earnings are likely to fare better.

Stock ideas

There are some areas of interest which we are constantly monitoring at Munro where we have identified long-term drivers of growth, as highlighted in the below chart.

NextEra Energy

At Munro we believe decarbonisation will be one of the bigger trends over the next three decades and NextEra Energy is the largest renewable utility in the US. They are a $US200 billion company that is dominant in renewable infrastructure across the US. Following the signing of the Inflation Reduction Act in the US, which includes $US375 billion to be invested over the decade in climate-fighting initiatives, the US is now irreversibly on the path to decarbonising.

As a result of that bill, you now have 10 years’ worth of credits for wind, solar, nuclear, hydrogen, carbon capture, etc. The regulatory framework for the next decade is now in place, which should allow the earnings of NextEra to accelerate as they develop these projects. No economic slowdown is going to stop that.

Source: Morningstar

Danaher

Danaher is a US-based equipment supplier to the life sciences industry. It is also leveraged to the development of biologic drugs. Biopharmaceuticals, or biologics, differ from regular pharmaceuticals in that they are developed, derived or semi-synthesized from biological sources, rather than being completely synthesized. A simple example is the mRNA vaccine Pfizer, which worked better than the protein vaccine AstraZeneca in protecting against severe infections of Covid-19.

As more biologics come to market, they will need more of the equipment that Danaher supplies. As such, Danaher is a fairly macro insensitive company in the healthcare sector. If you think interest rates will peak at 3%, at roughly 25 times earnings and growing at 10% per annum, Danaher is a reasonably good investment. We bought the company five years ago and it has continually done what it says it is going to do.

Source: Morningstar

Glass half empty or half full

As we wait for the earnings story to play out, we have already invested around a third of the funds we had sitting on the sidelines in companies where we believe there are long-term drivers of earnings, and which will not suffer downgrades.

Market highs and lows will always have twists and turns. The market may have already bottomed, or it could still be on the way down. The market doesn't give a big 'all clear' sign when it reaches a bottom, but we believe the three factors we have outlined above provide helpful signposts for working out when the worst will be over.

 

Nick Griffin is Chief Investment Officer at Munro Partners. Munro is a specialist investment manager partner of GSFM Funds Management, a sponsor of Firstlinks. The information included in this article is provided for informational purposes only. Munro Partners do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions.

For more articles and papers from GSFM and partners, click here.

 

RELATED ARTICLES

6 key themes driving bond markets

Trump vs Powell: Who will blink first?

The RBA deserves kudos for a job well done

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Chinese steel - building a Sydney Harbour Bridge every 10 minutes

China's steel production, equivalent to building one Sydney Harbour Bridge every 10 minutes, has driven Australia's economic growth. With China's slowdown, what does this mean for Australia's economy and investments?

Latest Updates

Economy

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Investing

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Property

Australian house price speculators: What were you thinking?

Australian housing’s 50-year boom was driven by falling rates and rising borrowing power — not rent or yield. With those drivers exhausted, future returns must reconcile with economic fundamentals. Are we ready?

Shares

ASX reporting season: Room for optimism

Despite mixed ASX results, the market has shown surprising resilience. With rate cuts ahead and economic conditions improving, investors should look beyond short-term noise and position for a potential cyclical upswing.

Property

A Bunnings play without the hefty price tag

BWT Trust has moved to bring management in house. Meanwhile, many of the properties it leases to Bunnings have been repriced to materially higher rents. This has removed two of the key 'snags' holding back the stock.

Investment strategies

Replacing bank hybrids with something similar

With APRA phasing out bank hybrids from 2027, investors must reassess these complex instruments. A synthetic hybrid strategy may offer similar returns but with greater control and clearer understanding of risks.

Shares

Nvidia's CEO is selling. Here's why Aussie investors should care

The magnitude of founder Jensen Huang’s selldown may seem small, but the signal is hard to ignore. When the person with the clearest insight into the company’s future starts cashing out, it’s worth asking why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.