Market Insights - January 30, 2023

Economic news from the eurozone continues to be surprisingly upbeat, alleviating fears about the region’s economy. The purchasing managers’ index (PMI) picked up by more than forecast in January and, against all expectations, is now in expansion territory. The UK’s PMI, however, sank into contraction territory, signalling a heightened risk of recession.

High-frequency data collected since the start of the Year of the Rabbit show that domestic travel in China is up 30% on 2022. According to the Ministry of Culture and Tourism, tourist numbers are back at 88% of pre-pandemic levels, a sign that consumer spending and travel have both bounced back. On the first day of trading after the holiday week, domestic A shares were lifted by this news.

Global stock market indexes rebounded sharply in January, but Switzerland’s SPI seemed to be struggling. This is because the index’s defensive heavyweights – Roche, Nestlé and Novartis – underperformed considerably after being shunned by investors. Investors’ renewed risk appetite makes Swiss small and mid caps more appealing, and we are now bullish on these stocks.

USA – a rebound is on the cards

There was no famous year-end rally on the US stock markets in 2022, even though inflation started to decline at a faster pace. We can blame the US Federal Reserve (Fed) for this: its very hawkish tone has prompted fears that it has made a monetary policy error. Investors are concerned that the country might slide into recession if Jerome Powell and his colleagues keep raising interest rates. We don’t think this is the most likely scenario, however. The country’s strong economic fundamentals should help the Fed to see sense in the coming months, and consumer prices have started to decline on the back of falling energy and food prices.

We think that investors’ attention will quickly shift from inflation to US companies’ growth prospects in 2023. The economic slowdown under way has already been broadly factored in by most analysts and economists. They will most likely need to make another downward adjustment to their forecasts. In fact, some have already started doing this during the current earnings season. Once market expectations are more reasonable, investors should see some positive surprises from companies – and that’s something we’ll need if a sustained market rebound is to take shape.

On another positive note, the excessive valuations in early 2022, which brought back painful memories of the tech bubble bursting in the early 2000s, have all but disappeared after a sharp, 12-month-long correction. We even think that multiples are poised to expand again. When high in-
flation starts to decelerate quickly, this usually pushes P/E ratios up by around 20%. The P/E ratio on US stocks is currently 16.5 – which is in line with the 25-year average – and could be closer to 19 by the end of the year. This region’s stock markets therefore look set to do well in 2023, although we’re likely to see some more companies revise down their earnings forecasts.

We will be looking to increase our exposure to US equities when the technical configuration is right. There will be a few more hurdles to overcome in the coming days, with the tech sector titans publishing their earnings and the Fed meeting on 1 February.

Forex – is the euro back in favour?

It looks like the dollar’s long rally could be coming to an end. After gaining ground on most currencies over the past two years, the greenback has been running out of steam in recent weeks. This is not surprising. First, the dollar is slightly overvalued relative to its estimated theoretical value based on purchasing power parity. And second, exchange rate trends are being driven mainly by central bank moves, just like in 2022. Despite sticking to its strongly anti-inflation message, the Fed has nearly achieved its goal and is preparing to make its last few rate hikes. At the same time, the Fed’s European peers − at least the European Central Bank (ECB) and the Bank of England − will keep raising interest rates for some time. Unsurprisingly, the Fed’s divergent monetary policy is starting to penalise the dollar, particularly against the euro. Further pressure is coming from the sharp uptick in European bond yields in recent months, which has narrowed the gap with the US market. It is now more difficult for the US to attract the capital needed to fund its trade deficit, which it has struggled to rein in since the COVID-19 pandemic. With the economic situation in Europe less affected than expected by energy supply concerns, the euro could make some real headway. What’s more, the euro/franc spread clearly favours the single currency. The Swiss National Bank will stop raising rates well before the ECB, and that could help the euro end (at least temporarily) its long downward slide against the franc.