Since the beginning of the year, optimism about sustained decline in inflation has caused a rally in equity- and bond markets, as well as a weaker US Dollar. This is opposite of last year’s market performance as the effect of negative shocks from the pandemic (falling goods prices) and the Ukraine war (falling energy prices) are diminishing. Lower inflation means less restrictive monetary policies and smaller decline in purchasing power. Both factors have positive impacts on real economic growth. As the European economy proved more resilient than anticipated at the end of 2022, experts expect the Eurozone will avoid a recession this year. However, a “mild recession” in the US in the second half of the year is predicted. Important questions are how consumption and labour market will develop. Consumer spending accounts for two-thirds of the U.S. economy and plays a more important role in the US than in the other countries.
The European equity markets outperformed the US market for the fifth month in a row. It is earnings season now when publicly traded companies report their financial information. So far around 40% of companies in the S&P 500 Index have reported their 4th Quarter 2022 earnings. About 66% of the companies beat earnings expectations. Companies focus on the US market and are growth-driven enjoyed stronger growth than export-oriented and value-driven companies.
After better-than-expected earnings reports in the previous quarters, weaker company results are expected in Europe. In this environment the ATX Index moved up in line with the international equity markets. Cyclical sectors (Wienerberger, Voest, Lenzing) and banking sector (Erste, Bawag) showed particularly positive performance. Besides the earnings season, a partial takeover offer of Vienna Airport is an important topic.
In addition, strong tailwind comes from China. China’s unexpected zero-Covid policy U-turn and selective supporting measures for real estate developers indicate a V-shaped (rapid) economic recovery in the first half of this year. China’s reopening could boost the global growth.
As long as optimism about sustained inflation decline outshines growth concerns, environment for risky asset classes such as equities – under otherwise the same conditions – remains constructive.
Author:
Gabriela Tinti, CPM
Erste Asset Management GmbH – Member of Erste Group
Head of Desk Equities AT
1 February 2023
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Note
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