The year 2023 has started off on the right foot for the financial markets. the US S&P500 index which has risen by 8% in dollars since the start of the year, and the Euro Stoxx 50 by more than 11% in euros.
Opportunities and risks for equity markets
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Oddo BHF analysts predict a slowdown in the global growth trend this year compared to 2022 and that there will be a… stagflation scenario in the coming months caused by the supply shock that occurred last year. The good news is that the Chinese government’s decision to end the zero covid policy will undoubtedly have a positive impact on the global economy; the bad news is that inflation will continue to hit hard in 2023. On the energy front, the situation is considered reassuring, at least for now, with European gas reserves sufficient to avoid the scenario of a major energy crisis .
Why European equities are preferred to US equities
“We favor European equities over American equities”, is the comment from Jan Viebig and Laurent Denize of Oddo BHF. “With a price-to-book ratio of 1.7 European equities are trading at valuation levels close to their long-term average”.while US equities, with a price-to-book ratio of 4.1, are valued well above their long-term average,” the two experts explain.
The euro will strengthen against the dollar
On the currency front, the interest rate differential between the dollar and those of the euro zone should narrow, the european currency should benefit from the greenback. “Furthermore, the purchasing power parity mechanism plays more in favor of an appreciation of the euro”, underline the experts of Oddo BHF, who add that so far, the flight towards the American dollar has driven by the supply shock and when this effect ends, a reversal should occur.
Extend the duration of the bond portfolio
For Viebig and Denize, inflation peaked and interest rates rose. the cycle of rising interest rates will end earlier in the United States. and then in Europe, as the Fed embarked on restrictive policies four months before the ECB. Currently, the rates are 5.2% in the euro zone and 5.7% in the United States. According to expert estimates, interest rates across the Atlantic should rise another 50 basis points by May, while in Europe an increase in the deposit rate from 2.5% to 3.5% is expected by July. “After maintaining a short span last year, the time has come to gradually increase the remaining maturities.. We believe that investments in corporate bonds are particularly attractive at the moment, not only because interest rates have risen significantly, but also because these securities offer attractive risk premiums”, continue- they.
Three scenarios
In addition to the scenario described so far, to which analysts assign a probability of 70%, there are two others: a negative with a probability of 20% and a positive with a probability of 10%. The first case envisages a worsening of the energy crisis in Europe.which would disadvantage European businesses and erode the purchasing power of consumers. As a result, inflation would remain high, forcing the ECB to raise rates further and increasing the likelihood of a recession. “The main driver of this scenario will be cash”, warn the two experts from Oddo BHF. Meanwhile, the war escalates on Europe’s doorstep as tensions rise between China and Taiwan. In the positive scenario, the war between Russia and Ukraine is coming to an end.while Beijing’s reopenings not only support Dragon’s 4.7% growth this year, but also imply an unblocking of global supply chains and a recovery in domestic consumption. “In July 2022, we had already moved from a positioning that was underweight the stock to a more neutral positioning. But after evaluating the different scenarios, we are more optimistic”, indicate Viebig and Denize, who advise to maintain a neutral and more constructive position on the title. That being said, here the operational council from analysts: preference for European equities in view of a revaluation of the euro, lengthening of the duration of the bond portfolio and emphasis on corporate bonds, which should once again offer attractive risk premia. ()
