Recap & Outlook

 Munich, January 12th 2023

The stock market year of 2022 is over … it can only get better

One of the defining figures of the past stock market year, in the negative sense, was without doubt Russia’s President Vladimir Putin and the head of the US Federal Reserve (FED), Jerome Powell. While the former managed to make us aware of the vulnerability of global commodities and energy supplies, the latter made it clear that the years of cheap money and excessive debt are now over.

Both individuals also had a significant impact on inflation last year through their political actions, as Putin’s war in Ukraine forced the West to respond with economic sanctions. This “loose-loose” situation caused the prices for industrial metals and grain exports to rise rapidly in a very short time and later the prices for fossil fuels such as gas to almost explode.

On the other side of the Atlantic, the Fed began its fight against rising inflation at the beginning of the year and raised the key US interest rate by more than 4% by the end of the year. This brash action by the Fed not only caused inflation in the U.S. to fall significantly in the second half of the year, but also served as a blueprint for other central banks, such as the ECB, to turn their interest rate policies around. The U.S. dollar was also impressed by the Fed’s strong interest rate policy and started a strong appreciation rally into the summer, which ultimately culminated in the EUR/USD reaching parity in August. Partly responsible for this US dollar rally was also the worsening energy problem in Europe in Q2, when gas
deliveries suddenly stopped, and energy-intensive industries had to fear rationing overnight.

Private households were also unable to escape the energy problem and were confronted with rising electricity prices, which triggered a fundamental debate in Germany about pricing in the electricity market. Climatic conditions also contributed to the energy problem and, with a lack of precipitation, forced French energy companies to take their nuclear power plants off the grid at times, which resulted in a tenfold increase in electricity prices. Among the few beneficiaries of this development were those companies and countries that helped to fill Europe’s liquefied gas storage facilities in a spirit of “neighborly assistance” and on “friendly terms”.

Less open-minded and supportive, on the other hand, was the Chinese government, which continued to push its communistinfluenced agenda over the course of the year and tended to focus its economic attention on developments at home. It was also China that brought the topic of Corona, which had rather moved into the background in Western countries, back into the media spotlight by continuing its strict lockdown policy from previous years and temporarily sealing off entire cities for the “protection [and displeasure] of the population”.

Such protection, on the other hand, is what the customers of the second-largest crypto exchange “FTX” would have wished for, whose insolvency in 2022 brought crypto investors, some of whom were already suffering, a total loss of their investment. Although not a total loss, investors in U.S. technology stocks had to cope with significant price losses last year. But also, the bond market had to accept unusually high price losses. On the commodities side, investors could not go far wrong in the first half of the year, neither with direct investments nor with commodity stocks.

Overall, it can be said that stock market investors had a very difficult year last year, which was strongly influenced by political events. As an investor, one could already speak of a successful year if capital was preserved, but of an outstanding year only if purchasing power was also preserved. Despite the overall quite negative capital market year 2022, there was also a small ray of hope with the IPO of Porsche AG, which from an investor’s point of view can also give hope for a better stock market year 2023.

What can we expect form 2023?

The many thematic flashpoints and major fires from 2022 have also been reflected accordingly in the development of the stock and bond markets in recent quarters. For the new year 2023, the presumption is therefore high that the majority of investors should by now have digested the formative themes of the previous year, such as inflation, the interest rate turnaround, and war, and that a renewed flare-up of these flashpoints should not surprise the majority of investors again to the same extent. In short, there should already be a lot of negativity embedded in the current low equity prices.

The year-to-date rally we are currently seeing in the European equity market and the recent rally in corporate bonds with poor credit ratings could support this thesis. In addition, many capital market experts believe that the worst in terms of inflation and stock market corrections is already behind us. Economic experts, on the other hand, fear that the increased cost level from the last quarter will not be felt in the balance sheets of many companies until 2023 and that this aspect has so far been largely ignored by many capital market analysts in their profit expectations. While there is agreement that global economic growth will slow this year, it is unclear to what extent the U.S. economy will contribute to this slowdown, as signs of a recession have been increasing recently. The real estate market, which plays a key economic role in both the U.S. and China, also plays a role in this consideration. 

On the other hand, China’s still expansive central bank policy and the much more economically open stance recently adopted by the communist ruling party give cause for hope that China could become a (small) support factor for the global economy. The recent weakening of the U.S. dollar, lower freight rates for the transport of goods, and declining energy costs can also be cited as supportive factors. The interest rate policy of the central banks, in particular the U.S. Federal Reserve, will continue to be closely linked to inflation expectations in the new year. Here, too, the Fed has recently reiterated its willingness to accept the risk of a recessionary economy in the fight against high inflation. So, what should investors do?

As was the case last year, it is probably advisable for 2023 to make investments “on sight” for the time being, i.e., not to put all your eggs in one basket, but to be ready to pull the ripcord at any time. Good hedging and liquidity management therefore remain important from an investor’s perspective. For the longterm-oriented investor or “buy-and-hold” strategist, there are now opportunities to get a foot in the door after the poor stock market performance last year, especially in the technology sector.

Article by Markus Polz

Head of  Asset Management at CM-Equity AG

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