Source: Gilles Coens, investment expert at MeDirect
2023 has started on a positive note on the stock markets. For example, the US stock market index SP500 is 4.7% in the green since the start of the year. The European Index Eurostoxx 50 is even 7.5% higher. Chinese equities are also making a strong comeback with a +10% performance for the Hang Seng Index (Hong Kong).
China is one of the reasons for the good market performance since the beginning of the year. The abandonment of the zero-covid policy and the revocation of the economy gives oxygen to the local and global economy. Furthermore, falling energy prices and inflation figures also have a positive impact on sentiment. Falling energy prices have also mainly benefited European equities, which partly explains the strong performance. The doomsday scenario of massive shutdown plans for European companies seems, for this year, to be avoided. A lower energy bill also benefits many European companies and consumers.
Inflation will remain a key theme in 2023
Falling inflation figures raise hopes for a less aggressive fight against inflation by the central banks and a soft landing of the economy as a result. Although central banks are currently still hinting at further interest rate hikes in their reports. The consensus of analysts today is that we have reached the inflation peak and inflation will fall back under control. Although we probably won’t turn to the earlier pre-covid inflation figures. A number of elements will keep inflation structurally higher than in the past. Think, for example, of “deglobalization” with, to a certain extent, a tendency towards local production, but also the acceleration of the energy transition and climate objectives will have a certain inflationary effect in the coming years.
All indications are that the Fed and ECB will raise interest rates further until the spring/summer of 2023. The question is what will happen from the 2nd or 3rd quarter of the year. Some analysts are counting on a “pivot” from central banks with interest rate cuts in their sights again. For this, however, one would have to see a sharp deterioration in employment. On the other hand, there are also energy supply challenges for the winter of 2023-24 that could have another inflationary effect, especially for Europe. A more plausible scenario is that we move towards a mild recession and by spring/summer the US and European central banks will press the pause button on interest rate hikes.
Business
In addition to inflation, it will also be important to look at company results in the coming weeks and months. Even though profit expectations have been revised downwards in recent months, it remains to be seen how hard the interest rate rises will affect the company’s results. In both the US and Europe, we saw that consumption and investment are moving in a downward direction, which is a logical consequence of the various interest rate rises.
On 24 January, we also received a positive surprise in Europe from the Product Purchasing Managers’ Indices (PMIs) [1]. The S&P Global eurozone composite PMI rose to 50.2 in January from 49.3 in December, better than analysts’ expectations of 49.8. His highest point since 7 months. A PMI above 50 indicates an expansion of economic activity. This result is encouraging for the European economy.
What does this mean for my investments?
In addition to inflation, geopolitical tensions also play a role. Uncertainty is inherently part of the economy. Those who wait for the uncertainty to subside will probably never step into the markets, or get into when prices are at their highest point.
Look at the valuations
If we look at the valuations of shares, we see that the price-to-earnings ratios of shares are valued significantly cheaper in January 2023 than in January 2022. In part, investors are already taking into account possible profit declines of companies, although the question remains whether they take them into account enough in the short term. However, this makes it an interesting entry point, especially for the investor, who thinks in the longer term. The graph below shows the valuations of the end of 2022 (light blue diamonds) compared to the valuations of the end of 2021 (dark blue diamonds), and this against the maximum & minimum valuations and average valuation at 25 years.
Source: JP Morgan Asset Management Guide to the Markets Q1 2023
Emerging markets
Valuations are also low in growth markets. However, this is what they were last year. The abandonment of the zero-covid policy means that Chinese companies can resume their activities in a normal way. The market is also counting on a stabilisation of inflation and monetary policy in developed countries, which could have a positive impact on more cyclical growth markets by the middle of the year.
Emerging markets have been a forgotten asset class in recent years. Today it is worth looking for opportunities within these markets. However, looking for shares yourself in emerging markets is not an easy matter. Investment funds offer the possibility to easily build exposure to growth markets, where the manager is responsible for the selection of shares across different sectors and/or regions.
Bonds are back
Another forgotten asset class of recent years is bonds. Low or even negative interest rates gave investors little perspective. In 2022, due to the sharp rise in interest rates, they will not give any diversification advantage. They fell along with shares. But a year like 2022, where stocks and bonds take a dive together, is extremely rare. Today’s higher interest rates offer them the opportunity not only to deliver returns, but also to reintroduce them into a portfolio as a diversification. It is not an easy choice to know which bonds to buy. Therefore, bond funds or mixed funds can offer a solution for professional management of these.
Energy transition
An essential story, also for your portfolio The negative impact of our dependence on third countries on the energy supply of EU countries has made something clear to us. The transition to renewable energy is not only a good thing for the climate, but also for energy security in Europe. To invest in the energy transition, it is necessary to respond to a long-term trend that has started, but that can last for several decades. Renewable energy is playing an increasingly prominent role in the energy mix. Nevertheless, it looks like the transition will be accelerated and investments will be increased. Investing in the energy transition can be done through various thematic investment funds that respond to this or to climate change.
[1] Purchasing Managers’ Index: Economic indicator resulting from monthly surveys of companies. It reflects the confidence of purchasing directors. A PMI below 50 indicates a contraction of activity, above 50 indicates positive confidence and an expansion of economic activity and growth is expected.
Disclaimer
The financial instruments discussed may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
If you invest in any product, you may lose some or all the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from any investment may go down as well as up. Products may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund and ETFs (Exchange traded funds) should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc. MeDirect Bank (Malta) plc, company registration number C34125, is licensed to undertake the business of banking in terms of the Banking Act (Cap. 371) and investment services under the Investment Services Act (Cap. 370).