Stocks rose last week after the US central bank indicated it was prepared to slow down the pace of interest rate increases.
Deutsche Bank recently published its 2023 economic outlook. The bank predicts that:
1. GDP will decline 1% in the euro area and 2% in the US.
2. $SPX500 will rally to 4500 in Q1 2023, before slumping to 3250 in Q3 as the recession hits. The index will recover to 4500 by the end of the year, as focus turns to the better 2024 outlook.
3. US bond yields will be stable, while German bond yields will increase.
4. $EURUSD will rally to 1.10-1.15.
We think this is a reasonable take on what to expect. Like Deutsche, we are bullish in the near term, but expect a volatile 2023.
In terms of what investments should outperform the market, the data show that European equities are under-owned at the moment. This makes sense given that Europe was hit by the war in Ukraine and an energy crisis this year. The energy situation seems to have stabilised, with gas inventories still well stocked, while some expect a ceasefire to the war in Ukraine will eventually come about. The market cares about the direction things are moving in, so if the situation improves even slightly, European stocks should do well.
Within Europe, we believe cyclical stocks should outperform. Cyclical stocks, such as banks, have historically benefited from Chinese stimulus, so if China reopens in 2023 as we expect, European banks should outperform.
We thus continue to hold a portfolio full of banks. Banks are performing well operationally: their profitability is at its highest level in 11 years. Yet their valuation relative to the market remains extremely low. We believe that sooner or later the market will close this disconnect, and when it happens, bank investors will make money.
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The oil companies $PBR (Petroleo Brasileiro SA Petrobras), $BP.L (BP), $SHEL (Shell PLS (ADR)) and $REP.MC (Repsol) were sold because the oil price declined. We may re-enter oil positions should the oil price recover.
A position was initiated in $UNI.MC (Unicaja Banco SA) .