The equity market year 2022 was mainly characterized by the one-two punch of monetary and geopolitical policy and ended with accentuated losses in both bonds and equities. However, the start to the year has so far been mostly positive.
In our opinion, the major macro issues will again be one of the determining factors for equity market performance this year. The decisive factors here will be the extent to which inflation continues to fall in the coming months, when the central banks pause their interest rate hike cycles, and how lasting the skid marks in the economy will be as a result of the monetary policy tightening already seen so far. In essence, we expect these complex problem areas to become less acute or even dissipate beyond the year.
Inflation rates in the USA already peaked in June of last year (!) and, against the background of the decline in commodity prices and the easing of the supply chain disruptions, a further substantial decline in price momentum is to be expected this year. This is likely to be somewhat more gradual in Europe, but here, too, further easing is to be expected, even though core inflation is likely to remain high. As a result, the central banks should then also gradually swing toward pausing their tightening course in the coming months. Here, the Fed is certainly a few steps ahead of the ECB and consequently we will see "only" two more interest rate hikes in Q1 in the USA. In contrast, after the "hawkish" meeting in December, our economists believe that the ECB should raise the key rate by 2 x 50 bp in Q1 and 2 x 25 bp to then 3.5% in the deposit rate. All in all, we still see uncertainty for the equity markets in the short-term, but this should dissipate in Q2 with the increasing certainty of an end to the interest rate hikes.
Economically, a eurozone recession and a weakening of the US economy are already clearly reflected in stock prices. Moreover, as there are already visible stabilization tendencies in European leading indicators and we do not expect a sharp US recession, this influencing factor should even establish itself as supportive for equities in the course of the year thanks to the economic recovery we expect in the second half of the year.
With regard to corporate earnings, there is certainly still a need for a downward adjustment of analysts' estimates in the short-term. In this respect, the Q4 reporting season, which will soon be in full swing, will be of particular interest, especially since many companies will then also issue an outlook for the full year. However, we do not see a major slump in profits across the board, as is usually the case in a difficult economic environment. After all, companies are still managing to pass on the higher input prices to end customers to a certain extent.
All in all, the need for short-term adjustments in earnings estimates, mixed economic data points and the interest rate steps coming up in the next few months could still weigh somewhat. For the remainder of the year and for the year as a whole, however, we are optimistic for the stock markets due to the significantly brightening influencing factors. This year, we expect above-average increases in particular from sectors (e.g. IT, communication services and consumer discretionary), which lagged significantly behind last year. We also expect the ATX to outperform. Here, financials are benefiting from a now much more favorable interest rate environment. Oil and gas stocks are also experiencing tailwinds against the backdrop of continued relatively high energy prices. In addition, we consider the Austrian equity market to be attractive from a valuation perspective.
Author:
Christian Hinterwallner
Head of Equity Research
Raiffeisen Research / Raiffeisen Bank International
12 January 2023
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.
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