Current stock market outlook – February 2023

February 7, 2023

'Optimistic start to the new stock market year'

What is currently driving the financial markets?

The financial markets have made a positive start to the new year. Last week in particular, the stock markets rose sharply after the US Federal Reserve announced that it would not be tightening its monetary policy any further. As expected, the Fed raised the key interest rate by 0.25 % and stated that progress was being made in the fight against inflation. The European Central Bank (ECB) and the Bank of England (BoE) also raised their key interest rates by 0.5 % each. However, while Christine Lagarde, President of the ECB, made it clear that further interest rate hikes are on the agenda, the BoE's tone was somewhat different and there was already talk of the possibility of a less restrictive monetary policy in future. It remains the case that the financial markets are literally hanging on the lips of the central bankers and are reacting with correspondingly high levels of nervousness.

The latest economic data – particularly in the US – paints a positive picture overall. For example, many more new jobs were recently created in the USA than expected. The labor market continues to run hot with correspondingly low unemployment rates. A much-noticed indicator – the so-called purchasing managers' indices, which are regarded as a precursor to the economic development of a national economy – show an interesting picture, particularly in the USA: In the services sector, the latest surveys have been positive and point to further growth. The situation is different in the manufacturing sector, where the figures were rather disappointing.

Meanwhile, the corporate results reporting season paints a gloomy picture. There are signs of a slowdown almost everywhere: higher input costs and wages as well as cautious statements on the expected business performance in 2023 are key topics. However, many companies were able to score points by communicating appropriate, targeted measures to deal with the challenges.

What's next for the financial markets?

The 'reopening' in China must continue to be monitored. It is becoming increasingly apparent that economic activities are gaining further momentum and breadth after the opening. The strong recovery in travel activity in China is remarkable, very similar to what we saw at the time of the reopening in Western countries. The developments in China are of great importance for the global economy. As the second-largest economy, China has become heavily integrated into the global economy in recent years, both as a sales market for many products and services and as a producer and therefore exporter in many key areas. Production in many areas of industry has now increased rapidly again, so it can be assumed that there should be no major shortages in the consumption of local products and therefore no sharp rise in inflation. A very positive scenario is therefore conceivable for China in the coming months: A strongly prospering economy with inflation that is not too high at the same time.

It will now be important to see whether and which stimulus programs the government will tackle. The focus will of course also be on the rapprochement between China and the USA. After fundamentally positive signals, relations have suffered a clear setback in connection with the affair surrounding the Chinese surveillance balloon. There are still a number of company results presentations to come, which will also be the focus of the financial markets in the coming weeks.

How do we position ourselves as an active asset manager?

We live in a world with a density of information and news like never before in human history. This often makes it difficult to see the big picture and we run the risk of literally not seeing the wood for the trees. In principle, it can be said that the growth prospects for the global economy are intact: The responsible players seem very keen to shape monetary and fiscal policy measures in such a way that a healthy level of economic growth is achieved. In addition, China offers immense potential for the global economy in the coming months in connection with the easing measures surrounding coronavirus.
There are also many indications that inflation is likely to have passed its peak. These are good prospects for the capital markets and have already led to rising share prices at the beginning of this year. We remain fundamentally positive about shares in quality companies with high pricing power. A selective approach therefore remains important. Temporary setbacks in share prices offer long-term investors good opportunities to buy shares at historically reasonable valuations. As is well known, the basis for the greatest wealth accumulation is created during a crisis and not 'at a high'.

Point Capital Group
7. February 2023