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.

 

  •   24 August 2022
  • 1
  •      
  •   

RELATED ARTICLES

Inflation BIG picture: Boomers got lucky, next Gen not so much

Shares rebound on hopes of war ending, but stalemate the likely outcome

Five simple reasons why Australian cash rates are highest

banner

Most viewed in recent weeks

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Are you making these SMSF mistakes?

After four decades advising investors, there are a few common mistakes I've seen SMSF investors make. From holding too much cash and chasing yield to overtrading and trusting tips. Are these errors costing you?

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Retirement spending is not one-size-fits-all

New data challenges the idea that Australians are underspending their super. The bigger issue may be helping retirees navigate complexity, make confident decisions and use their savings to support security, wellbeing and choice.

Why have Australian living standards 'fallen' and how do we fix it?

For the last few years there has been much talk of a 'cost-of-living' crisis in Australia and of 'falling living standards'. Lately this has flared up again with the pickup in inflation resulting in a renewed fall in real wages.

The missing link in the CGT debate

A little-noticed consequence of Labor’s tax changes could have implications well beyond investors’ tax bills. The issue raises bigger questions about incentives, capital allocation and the drivers of long-term economic growth.

Latest Updates

Planning

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved. 

Superannuation

How much super should you have?

Average super balances are one of the most misleading benchmarks. They ignore your goals, spending and future needs, creating a false sense of security. Here is how I calculate exactly where I need to be at every decade.

Retirement

Retiring from work is easy, retiring into life is harder

Most people spend decades planning how to retire. Far fewer plan for what comes next. The biggest retirement challenge isn't always financial, and it often catches even the most prepared retirees completely off guard.

Shares

Right asset class, wrong index: the trap in Australian small caps

Most Australian portfolios are concentrated in large caps, with relatively little exposure to smaller companies. But what if the biggest risk isn't the economy, interest rates or valuations? For many, the risk is hidden in plain sight. 

Property

Are these assets the missing piece in Australian portfolios?

Many investors remain concentrated in shares, cash and property. Despite their popularity among institutional investors, real assets remain underrepresented in many SMSF portfolios. Could they be the missing piece?

Investment strategies

The biggest risk that buy-and-hold investors ignore

Investors spend decades learning how to stay invested, yet few have a plan for getting out. When a financial goal has a hard deadline, a worked example shows why a fixed derisking schedule should outrank buy-and-hold discipline.

Investment strategies

How passive investing is driving the decline of active fund alpha

Why have active managers struggled as passive investing has surged? Research suggests that flows into index funds and ETFs are creating structural headwinds, penalising the stock-picking strategies that once generated alpha.  

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.