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Markets Update February 2023 - Interest rate worries dampen stock market euphoria

Bad Homburg, 2/27/2023
  • Stock markets weaken after strong start to the year
  • Inflation rates fall only slowly
  • Central banks forced to raise key interest rates further

After a strong start to the year, the stock markets recently lost considerable momentum. In the first few weeks of the investment year, everything initially pointed to a real sweet spot: improved economic prospects in China and Europe, slowing inflation momentum and thus the prospect of an imminent end to monetary tightening in the USA triggered double-digit price gains at times. Some investment strategists were already talking about the end of the bear market. But this announcement came too soon. As has so often been the case in the history of the financial markets, this time, too, it is becoming clear that fighting very high inflation rates is a marathon, not a sprint. In fact, as the major central banks are forced to raise key rates further, the risk of a recession later in the year is increasing. This is because it takes some time for monetary policy to take full effect. However, once the interest rate hikes have reached the real economy, this will inevitably put the brakes on economic activity.

Correction risks increase

Nevertheless, there is a slight glimmer of hope: corporate profits are more stable than expected and are likely to be lifted further in part by general inflationary pressures. However, the exaggerated valuations on the markets remain problematic. The very high level of interest rates on short-dated bonds suggests that key interest rates will rise noticeably in the medium term. This constellation is not compatible with the current stock market valuations, which in some cases are reminiscent of the times of the dotcom bubble. Further corrections could therefore follow.

Professional investors should therefore clearly underweight valuation-sensitive stocks in the current investment environment. At the same time, agile risk management is required in order to be able to respond adequately to the latent correction risks.

About FERI

Founded in 1987 and headquartered in Bad Homburg, Germany, the FERI Group has developed into one of the leading investment houses in the German-speaking area. FERI offers tailor-made solutions for institutional investors, family assets and trusts in the following areas:

The FERI Cognitive Finance Institute was formed in 2016. It is the strategic research centre and creative think tank of the FERI Group. The Institute focuses on innovative analyses and the development of methods for long-term oriented economic and capital market research. 

FERI and MLP currently manage assets of about EUR 55 billion in the Group, including round about EUR 15 billion in alternative investments. The FERI Group is headquartered in Bad Homburg and has locations in Dusseldorf, Hamburg, Luxembourg, Munich, Vienna and Zurich.

About Dr. Eduard Baitinger

Dr. Eduard Baitinger has been Head of Asset Allocation at FERI AG since 2015. Under the overall responsibility of the CIO of the FERI Group, Dr. Marcel V. Lähn, Dr. Baitinger is responsible for quantitative asset allocation in the CIO Office and various publications on the assessment of the international financial markets.

Before joining FERI, Dr. Baitinger was a research assistant at the University of Bremen and a financial analyst at an asset manager. In 2010, he completed his studies at the University of Bremen with a degree in economics, accompanied by a stay abroad in New York. In 2014, Eduard Baitinger completed his doctorate with distinction on new approaches to quantitative asset management. Dr. Baitinger publishes regularly in academic journals and acts as an academic reviewer.

Media relations contact

Marcel Renné

Chairman of the Board & CEO

Rathausplatz 8-10

D-61348 Bad Homburg

Dr. Eduard Baitinger