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Rupal Bhansali of Ariel Investments: Outlook Includes Earnings Recession for 2020

Summary of the guru's remarks about the earnings recession she foresees for the year

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Bram de Haas
Jan 17, 2020
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John Rogers (Trades, Portfolio) started Ariel Investments in 1983. The firm concentrates on finding value in small to medium-sized companies.Patience, independent thinking and a long-term outlook are the cornerstones of the firm’s investing philosophy. Its favorite investments are dominant in industries that have high barriers to entry. They also have sustainable competitive advantages and predictable fundamentals, as well as a price that is trading at a good value.

The Chief Investment Officer (CIO) of Ariel Investments International & Global Equities, Rupal Bhansali, participated in the famous Barron’s roundtable this year and discussed her 2020 outlook with Fox. She made several very important points that most people aren’t focusing on.

Bhansali believes people are confusing the market and the economy. The economy may not glide into a recession soon. The consumer is too strong for that to happen, in her view. But instead, we may have an earnings recession. An earnings recession means that companies see earnings deteriorate even though the consumer is strong. Just for the market to stay in place, multiples would need to go up further, and we are already at elevated multiples.

Bhansali points out that In fact we just had an earnings recession last year, but the market went up strongly. That happened because of a multiple expansion.


Now Bhansali says we are starting out 2020 from a pretty bad position. She likely means that multiples are stretched while she sees the distinct possibility that earnings will go down.

Bhansali says we’ve had a bifurcated market for a long time but that it isn't about tech or non-tech. Instead what she sees is that the overall economic indicators look great, but the economy is more vulnerable than people think.

CEO confidence indicators are weak. According to data from The Conference Board, CEOs remain reticent but did become slightly more confident in Q4. Chief Financial Officer (CFO) confidence also improved a bit in the final quarter, which is a positive, but the majority of them expect a recession before the end of 2020.

Bhansali cites strong consumer confidence, but that’s only true in the U.S., and even then there are concerns. From the Jan. 16 Conference Board press release:

"Lack of momentum suggests increasing concerns about the durability of global consumer spending in 2020.

Q4 2019 global consumer confidence was unchanged at 107, suggesting more optimistic than pessimistic consumers; however, out of 64 markets surveyed, 30 saw a decline in confidence.

Concerns about future job prospects, which had already increased in Q3 2019, have begun to weigh on consumer sentiment about personal finances and spending intentions.

While consumer confidence in North America and Asia-Pacific remains the highest, in China, Japan, and several Southeast Asian markets, confidence is under slightly greater strain.

Consumer confidence in the Euro Area is well below 100, but remained unchanged relative to previous quarters; Confidence declined in Germany, Italy and Spain, but improved in France."

Bhansali sees consumer loan growth at 4% but corporate loan growth at 0%. The total picture leads her to believe that the economy is more vulnerable than the headlines suggest.

Industrial activity and manufacturing are slowing down globally. Bhansali points out that manufacturing has the most time-tested relationship with real GDP growth. When manufacturing slows down, and it did slow down dramatically, it caused the Fed to stop hiking last year. 

Per Bhansali, we are in the last stages of an economy that is trying to power through but may ultimately not get there. If both her and the CFOs are right, we may first have an earnings recession quickly followed up by an economic one.


Ariel's recipe to get through the current environment consists of large allocations towards Microsoft (

MSFT, Financial), Philip Morris (PM), First American Financial (FAF, Financial), Lazard (LAZ, Financial) and Interpublic Group of Companies (IPG, Financial), among many others.

Disclosure: no positions

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