In this sense, it should be noted that the variable whose behavior has been decisive for the markets in 2022, high inflation, will remain so in the year starting today. While it is true that many investors are assuming that restrictive monetary policies will manage to bring this under control in 2023, we are not at all convinced that this will be the case.
In this sense, it should be noted that there are factors that could cause inflation to remain high in 2023, including the reopening of the economy for China, which in the first phase will introduce new entrants into the economy’s chains. Can cause stress. A rise in COVID-19 cases in the country as a result of global supply and in the second phase, when the Chinese economy begins to grow strongly again, supported by expansionary fiscal policies, could lead to an unwanted rise in prices of crude and oil.
Furthermore, and as has been the case throughout 2022, the maintenance of expansionary fiscal policies by many Western governments, in many cases for purely electoral reasons, will present additional difficulties for central banks in their effort to control high inflation. In this sense, it should be noted that if high inflation does not show clear signs of beginning to subside, bond and equity markets will remain under pressure.
Another factor that will be important for the future of the markets, and which could create new tensions in them, is the withdrawal of monetary stimulus by central banks, a process that, in our opinion, has just begun.
On this occasion, and despite the fact that many market agents do not fully believe it, central banks are serious and will do whatever is necessary in terms of rates to control inflation and reduce their growing balance sheets. He will do it.
We see no reason why central banks should “raise the gas pedal” as long as inflation remains far from the 2% target, even if their stance sends some major developed economies into recession.
As we’ve pointed out on several occasions, investors will have to get used to a new monetary landscape, one without unlimited liquidity and with interest rates that have been stagnant since the Great Financial Crisis at the end of the first decade of this year. century.
Finally, investors should closely monitor the development of earnings expectations of listed companies, a factor that is directly linked to the development of the global economy.
How deep the slowdown in global economic growth is, something that will be largely conditioned by the monetary policy of central banks and the ability of the Chinese economy to recover, will depend more or less on the downward revision that companies themselves and those covering them face. Analysts forecast their results, reviews that largely determine the behavior of these companies and the stock markets as a whole.
In this sense, it is worth pointing out that we believe the current estimates of results used by the analysts’ consensus are too optimistic, which will cause them to be revised downward, a process that has been underway on Wall Street for months. But practically it has not started in Europe.
Expectations of poor results will lower valuations and, most likely, will lead to downgrades in recommendations of many companies. On the contrary, if business results are able to remain better than our expectation, then it will be very positive for the future of stock markets in 2023.
In the coming weeks, we’ll be paying close attention to what companies announce about their expectations for results when they release their respective numbers for the last quarter of the year. If the number of companies revising them downwards is high, it could lead to a wider fall in the stock markets.
It is for all these reasons that, at least till the global macroeconomic scenario becomes clearer, we will maintain a conservative and prudent approach, parking some liquidity in our portfolios as the markets move before they certainly begin. The situation will worsen again. To improve.
In this context, we continue to bet on those sectors/stocks which provide high visibility in their results, which generate lot of free cash and which provide an attractive remuneration policy for the shareholders. Stocks traditionally classified as defensive—health, food, telecommunications and public services, whose demand for products and services is fairly inelastic—meet these criteria well.
We also believe that the energy sector is doing this at the moment, while we will give the banking sector a chance as long as the slowdown in global economic growth is moderate, as interest rate hikes will allow them for the first time. A long time to improve their margins and profitability.
The only “but” we hold for all these values is interventionism, which has taken root among governments, especially in Europe, and it has given many regions a lot of negative surprises in 2022, considering how its regulatory framework was modified so much that its taxation was enforced arbitrarily.
In theory, and until the “end of the tunnel” begins to appear, we will remain underweight in stocks classified as “growth.” Although they have been severely punished in 2022, they need to continue. Not so in 2023, especially if central banks persevere in their restrictive monetary policies.
Following the stock market crisis caused by the bursting of the “.com” bubble, these values underperformed the market for several years, with investors favoring the behavior of companies classified as “value”, something that What we do is not to deny it because this time it can happen again.