The global economic conditions have significantly changed in a short period of time. After years of historically low interest rates, low inflation rates, and a relatively stable global political situation, we are now facing new challenges. As a result of significant increases in energy prices and the resulting rise in inflation rates due to the Ukraine conflict, central banks have made an unprecedented turnaround in their monetary policies. The Fed has increased interest rates from 0.25% to 5% within a year, and the ECB has followed with a six-month delay. The goal of controlling inflation is being prioritized over the goal of a stable economic development, and a recession is being accepted. In this environment, there has been no safe haven for investors, and there has not been a year with such a negative combination of stock and bond returns in over 100 years. Since the beginning of the year, the situation has improved, with stocks performing well and bonds stabilizing. Central banks will make one or two more interest rate hikes at most, and the recession should be mild given the strong job market and stable private consumption. The Western world has learned from the past that globalization also has disadvantages, and many countries are now re-industrializing to avoid supply chain problems. Deglobalization is the new trend. The result will be a permanently higher price level - the 2% inflation target of central banks will not be sustained - and a "normal interest rate" level. The environment for stocks in this context should be positive, with current relative valuations favoring a higher weighting of European equities that have traded at significant valuation discounts in recent years. In the bond market, the high-yield sector is interesting, with spreads ranging from 450-500 bp depending on the region, and the risk of higher credit defaults due to recession being low.
Author:
Horst Simbürger, MSc, CEFA
Managing Director
CONVERTINVEST Financial Services GmbH
2 May 2023
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.