Countdown 2023, a look into the crystal ball: Part 4 - Lerbacher Kompetenzkreis.

 

At the end of the year, economists, investment strategists and asset managers look ahead. These days they publish their forecasts and strategies for the new year.

Especially with regard to the future course of the central banks and the economy, there is enormous uncertainty today. For investors, however, it is precisely these developments that are decisive. Corporate results depend on the economy. And the interest rate trend decisively determines how high the expected profits will be valued on the stock market.

Private wealth therefore asked the Lerbach Competence Circle the nine most important questions of its readers. 15 participants answered. The survey thus provides a good overview of how professionals assess the investment year 2023.

 

 

MONEY POLICY

Question 1: At what key interest rate will the peak in the interest rate cycle be reached?

On average, the circle of experts expects the US Federal Reserve to raise the Fed Funds corridor to between 5.0 and 5.25 per cent next year. The range of expectations is between 4.75 and 5.5 per cent.

In the euro area, experts on average expect the ECB's main refinancing rate to rise to 3.5 per cent. The extreme values are between 2.75 and 4 per cent.

Question 2: When do you expect the first key interest rate cut?

In the USA, the professional body expects the first key interest rate cut in the 4th quarter of 2023 The results vary widely. The range of answers lies between the 2nd quarter of 2023 and the 2nd quarter of 2024.

In the euro area, the professionals believe, such a step will take somewhat longer. On average, they estimate that it will take place in the first quarter of 2024, but here, too, the range of answers is enormous.

Our conclusion: If the pros as a group are right, interest rates will remain higher for longer. This basically means headwinds for the capital markets.

 

 

ECONOMIC ACTIVITY AND CORPORATE EARNINGS

Question 3: What is the probability of a soft landing for the US economy (NO two consecutive quarters of negative growth in 2023)?

The average of the probabilities mentioned is 44%. The mentions vary between 10 % and 70 %.

Question 4: What is the probability that there will NOT be a severe recession in the eurozone (i.e. the annual rate of real GDP in 2023 is better than minus 1.0% compared to 2022)?

The average of the probabilities mentioned is 55%. The mentions vary between 15 % and 80 %.

Our conclusion: The wide range of assessments shows how uncertain the economic outlook currently is.

As far as a soft landing of the US economy is concerned, the experts are more cautious than expected. We were particularly surprised by the vote on the Eurozone economy. A decline of 1.0 per cent in the national product would already be a severe cut. The fact that the professionals consider an even worse development possible with a probability of 45 percent is alarming.

Question 5: Most analysts still expect corporate profits to increase in 2023. How do you see earnings trends for companies in the DAX and the S&P 500?

For the S&P 500, the pros expect earnings to fall by two per cent in the first half of the year. In the second half of the year, aggregate earnings are expected to decline by another 0.5 per cent.

In terms of DAX companies, declines of 4 per cent are expected in the first half of 2023 and another 1.5 per cent in the second half.

Our conclusion: In earlier economic downturns, corporate earnings fell much more sharply. The professionals' forecasts should therefore encourage investors.

To illustrate: If the expectations of a slight decline in profits become reality, the DAX would be valued at 14000 points based on 2023 earnings with a P/E ratio of just under 12. That is not much. Given the prospect that earnings should rise again in 2024, investors could then actually overlook the 2023 earnings trough.

The valuation situation on the US equity market is more critical. With a P/E ratio of just over 18 based on expected 2023 earnings, the S&P 500 at 3850 points is still comparatively highly valued - especially if US interest rates remain high for longer.

INVESTOR SENTIMENT

Question 6: Equity prices (benchmark is MSCI ACWI) in 2023 will, on balance:

rise: remain about the same: fall:

say 7 out of 15 respondents think 5 participants believe 3 experts

Question 7: Bond yields (benchmark is 10-year Bunds and US Treasuries) will, on balance, in 2023:

rise: remain roughly constant: fall:

say 4 out of 15 respondents think 4 respondents think 7 experts believe

Our conclusion: 2023 is likely to be a positive investment year. Opportunities will arise in both equities and bonds over the course of the year. As risks are high and uncertainties are great, active management and stock selection should pay off.

 

 

FOOD FOR THOUGHT

Question 8: Please name your most interesting investment ideas for 2023:

- Investments in automation will increase because labour costs are rising. Corresponding providers (e.g. robotics) will profit.

- Because the Chinese economy is growing again, Asian stocks - especially China stocks - will be the big winners.

- The opening of China increases demand for energy and industrial commodities (oil, copper). In view of the limited supply, their prices are also climbing.

- Solidly financed US technology stocks start a comeback.

- High-yield bonds in the US and Europe could deliver double-digit returns. The peak of the economic downturn is the ideal time to buy.

- Innovations and takeovers boost the prices of biotech stocks.

- Longer-dated bonds in the subordinated segment are already attractive.

- 30-year Bunds are interesting in perspective because the ECB will consistently fight inflation.

- Gold - the price is rising to 2,500 dollars because more and more central banks and private individuals are turning to the currency of last resort out of fear of the loss of purchasing power of paper currencies. The price of silver is developing similarly positively.

- Vietnam - an emerging market with potential where share prices have fallen too far in 2022.

- Corporate bonds with good credit ratings (investment grade) yield 4-5% in euros and 6-7% in US dollars. This is enough to generate a positive return in real terms in 2023 because inflation rates are declining.

- Semiconductor stocks benefit from the start of a new growth cycle.

- Cyclical European equities have catch-up potential thanks to favourable valuations

 

Question 9: What surprises do you think are possible?

- The DAX is clearly outperforming the world equity market.

- Inflation rates are falling much faster than expected, especially in the USA.

- The central banks are not getting inflation under control and will have to pursue a more restrictive monetary policy for longer than expected.

- In the spring or summer of 2023, the fighting in Ukraine ends.

- Massive clashes between Greece and Turkey.

- Inflation and economic cycles become shorter, stronger and more erratic. This weighs on valuations because investors demand a higher risk premium. The potential for equities is therefore limited, and active management is becoming more important.

- The glyphosate legal dispute ends and Bayer shares shoot up (in the short term).

- A new financial crisis with rescue measures by the central banks.

- The Japanese central bank is forced to raise interest rates because inflation is also getting out of control in Japan.

- The energy situation in Europe will ease considerably (due to French nuclear power, recession and structural savings as well as more LNG) - the warnings heard in many quarters that winter 23/24 will be more critical than the current one will then be unjustified.

- The growth rate in China falls below three percent - a burden for the global economy.

 

We hope the Lerbach Competence Circle was able to provide you with inspiration and orientation and wish you a successful investment year 2023.

Yours sincerely,

Klaus Meitinger