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Markets Update November 2023 - Stock markets celebrate the end of the global rate hike cycle

Bad Homburg, 11/20/2023
  • Markets expect inflation to fall further
  • US economy with signs of weakness
  • Small caps as an opportunity in 2024

Easing inflationary pressure and weak US macro data have led to strong price gains on Wall Street. As there is currently little to suggest a second major wave of inflation, the markets are no longer expecting further interest rate hikes from the major central banks. The toughest monetary tightening cycle of the last 40 years is therefore potentially coming to an end. Looking ahead to 2024, it now even appears that key interest rate cuts cannot be ruled out again. In an environment of recessionary risks and high budget deficits, quantitative tightening is also unlikely to be maintained in 2024. This general expectation for the future has led to a noticeable fall in long-term interest rates on the markets, which in turn has boosted value-sensitive equities. Positive signals for risk investments have also recently come from the geopolitical sphere. There has been a rapprochement between US President Joe Biden and China's head of state Xi Jinping, while the feared escalation in the Middle East has failed to materialize. As the last quarter of the year is also characterized by positive seasonality, the end of the year is likely to be positive in the absence of geopolitical disruptions.

Attractive valuation levels for small caps

Small-cap companies have had a disastrous year on the stock market and have fallen far behind the broad market. Both the relative performance and the valuation gap of small caps are at multi-decade lows. On the one hand, the tightening of interest rates has had a significant impact on this segment. Small caps generally have a poorer balance sheet quality than highly capitalized companies and have to pay substantial premiums when interest rates rise. Secondly, small caps are usually much more sensitive to the economy than large caps. As a result, the global economic downturn has had a disproportionately negative impact on this segment. However, these negative factors are likely to subside over the course of the coming year and result in a significant catch-up movement for small caps. The interest rate environment is likely to be less restrictive than in 2023. Although no support is expected from the economic side in the first half of 2024, this should already be largely priced into the prices of small caps. Due to the attractive valuation levels, the small cap segment could be a sensible addition to the portfolios of professional investors with a view to 2024.

About FERI

The FERI Group, headquartered in Bad Homburg, Germany, was founded in 1987 and has developed into one of the leading multi-asset investment houses in the German-speaking region. FERI offers tailor-made solutions for institutional investors, family assets and foundations in the business areas:

Founded in 2016, the FERI Cognitive Finance Institute acts as a strategic research center and creative think tank within the FERI Group, with a clear focus on innovative analyses and method development for long-term aspects of economic and capital market research.

Together with MLP, FERI currently manages assets of approximately €56 billion, including around €18 billion in alternative investments. In addition to its headquarters in Bad Homburg, the FERI Group has offices in Düsseldorf, Hamburg, Munich, Luxembourg, 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.

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Marcel Renné

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D-61348 Bad Homburg

Dr. Eduard Baitinger