Current stock market outlook

January 10, 2023

'Slowed inflationary momentum'

What moves the markets

The last few weeks have continued to be dominated by central bank policy. When will interest rates stop being raised and when can we expect interest rates to be cut? How long will the central banks continue to fight inflation with high interest rates? These are currently the most burning questions on the financial markets. It is worth taking a look at the latest inflation data: there has recently been positive news in this regard in the eurozone, the USA and Switzerland: Certain inflation indicators have fallen. However, the labor markets remain very robust and wages are expected to continue rising in many areas. This is making services in particular more expensive.

How did the markets react?

Investors literally hang on the lips of central bankers and every statement immediately leads to corresponding swings on the stock markets. The same applies to the publication of economic data and so there was a lot of 'nervousness' on the markets.

What next?

Inflation is likely to be some time away from the central banks' target values. However, it will be interesting to see how the central banks deal with this: Will they really stick to the low target values or will they show flexibility? The latter currently seems more likely, as the central banks are all under great political pressure. No central banker wants to be accused of having virtually brought about a severe recession by pursuing an overly restrictive policy.A positive boost could also come from China in the near future: As soon as the pandemic is over, there is a good chance that consumption will pick up again and government stimulus programs may be added to the mix. After all, China accounts for around 20% of the global economy.

Accordingly, the outlook for the stock markets is not so bad. Of course, the war in Ukraine could well get worse and who knows what could go wrong between China, Taiwan and the USA. But these conflicts are no longer a secret. But what if the war can be ended? What if China adopts a conciliatory tone on Taiwan? The country has already taken a big, pragmatic step forward by abandoning its zero Covid policy. As mentioned, inflation is also pointing in the right direction again. In addition, equity valuations have eased noticeably following the correction. There is also currently a large consensus on the market, which is often a good counter-indicator: a recession is expected this year and everyone is pessimistic. Many are referring to the so-called inverted yield curves, which have been followed by recessions with great reliability in the past. We speak of inverted yield curves when long-term interest rates are lower than short-term interest rates. But this indicator is of course only a model. And models attempt to depict complex reality in a simplified form. It is therefore extremely interesting that the 'inventor' of this indicator, Professor Campbell Harvey, expects things to turn out differently this time: among other things, he sees the robust development on the labor markets as the reason for this and does not expect a recession in the US.

The turnaround in inflation, interest rates and economic growth will come and bring investors attractive returns again. Nobody knows exactly when that will be. But there is growing evidence that we are not too far away from these turning points. And the stock markets are known to anticipate future developments.

How we position ourselves

We are sticking to our defensive bias for the start of this year, but with the necessary flexibility to adjust as soon as the interest rate situation changes. On the equity side, we are invested in sectors such as consumer goods and healthcare. Such stocks offer opportunities even in a tense market environment. However, sectors such as energy and financials can also continue to benefit and are also represented in our portfolios. Gold as a real asset also provides a stable component. In the fixed-income sector, we invest exclusively in high-quality bonds. As far as currencies are concerned, we are focusing on the Swiss franc and the US dollar. The so-called 'greenback' also serves to a certain extent as a hedge in the event of a negative market trend.

Point Capital Group
10. January 2023