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The highest inflation rates in four decades, an abrupt rise in interest rates, distortions on the energy markets and acute geopolitical risks characterise the year 2022. As a result, the framework conditions for companies and investors have changed massively in a very short time. "Many market participants are experiencing the end of old certainties. The highly complex environment allows only limited forecasts for the time being. However, based on reduced valuation levels, noticeable recoveries on the stock markets are possible in 2023," says Dr Heinz-Werner Rapp, Management Board member and Chief Investment Officer of the FERI Group, summarising the 2023 outlook for the economy and capital markets.
The most important factor for the capital markets in 2023 is a slowdown of the high inflation dynamics. Both statistical base effects and the global economic slowdown would cause inflation to fall, which would allow for a dampening of the rise in interest rates so far. Nevertheless, inflation will remain at a high level in 2023, averaging more than 4 per cent in the USA and more than 7 per cent in the euro area. In the medium and long term, structural factors such as the demographically induced shortage of labour and the rising costs of the ecological transformation are expected to have an effect on generally higher inflation. "The long prevailing picture of low inflation and moderate interest rates has come to an end for the foreseeable future. This has tangible implications for all asset classes and their future return profiles," Rapp explains.
The economic outlook for 2023 is clearly subdued and characterised by high uncertainties. The global economy is burdened by the structural weakness in China, there are considerable risks of recession in Europe and significant risks in the USA. This means falling corporate profits and increased pressure on margins in cyclically sensitive sectors. The euro area would be hit harder than any other region in the world by the upheavals on the global energy markets. Significant losses in purchasing power due to high inflation and enormous cost and earnings burdens for many companies as well as the partial loss of competitiveness will soon lead to a recession there. "Even if the supply of electricity and gas succeeds without major problems this winter, the economic outlook in the euro area remains subdued due to weak global economic momentum and fundamental uncertainties regarding energy security," says Axel D. Angermann, Chief Economist of the FERI Group.
The stock markets had already priced in deteriorating fundamental data in 2022 and would now start the investment year 2023 from lower valuation levels. The downside potential of equities is therefore relatively limited. Despite a decline in corporate profits, equities could trend more favourably next year or even surprise on the upside. However, support from the bond markets, which should stabilise noticeably or even recover slightly in 2023, is important for this. For the time being, the central uncertainty factor remains monetary policy, especially in the USA. There is a risk of disappointment if inflation rates and expectations fall more slowly than expected. "Overall, the investment year 2023 is likely to be characterised by very changeable market developments and possible surprises in both directions. Active portfolio management that reacts flexibly to market-specific opportunities and risks is therefore essential," says FERI board member Rapp.
Dr Heinz-Werner Rapp provides a brief summary in the following video:
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