January 27, 2023

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The investment manager looks forward to 2023: - He is more likely to be disappointed than pleasantly surprised

The investment manager looks forward to 2023: – He is more likely to be disappointed than pleasantly surprised

Among the many interest rate increases around the world this week, the clear message from two of the most directional central banks stood out:

  • The US central bank (the Federal Reserve) now envisages an interest rate of 5.1 percent at the end of 2023, and no rate cut, compared to the 4.6 percent expected in September – and the central bank governor Jerome Powell He confirmed that the Fed will do what it needs to do to bring inflation down to 2%, after raising interest rates by 0.5 percentage points.
  • Christine LagardeFor his part, the ECB chief said that one should expect rate increases of 0.5 percentage points “for a period” in the future.

Alexander Miller, chief investment officer at Odin Forvaltning, says central bankers are now trying to determine the direction next year.

– What will be decisive in 2023 is how bad the economy will be, and how high the interest rate should be set. It’s likely to be somewhat similar, Miller says – a battle between inflation, interest rates and the real economy.

Moderate earnings estimates

Erik Bross, chief strategist at Nordea, believes that the impact of the interest rate increase on the companies’ actual earnings, as well as the guidance they provide for the coming quarters, will have a significant impact on the development of the shares.

Perhaps as important as inflation numbers and interest rate announcements.

Eric Bruce, Nordea Chief Strategist.

Eric Bruce, Nordea Chief Strategist. (Photo: Per Ståle Bugjerde)

As of now, there are relatively moderate earnings estimates, and I think the market is priced in for a weak development in the US economy, says Bruce.

He believes there is a “very good probability” that it will be no worse than what has been priced to the eye, but he points to the investment willingness of companies, which now have to take out loans at very different interest rates than before, as one of the uncertainties.

– It may be crucial to how difficult the economic downturn.

More likely to be disappointed

For his part, Alexander Miller believes that the stock market until today has taken into account a “mild recession” at best, based on market prices for interest rates in the central bank’s interest rate cuts already in the summer.

A rate cut is priced in part as a result of a belief that economic activity is too weak to involve less restrictive monetary policy, and partly as a result of what is seen as a sign of lower inflation.

Thus, this is completely contrary to what, for example, Jerome Powell and the US Central Bank indicate, which maintain that inflation must fall to 2% – and therefore interest rates will not be cut in 2023.

On the other hand, if a higher level of interest rates pushes economies into the ditch, with high unemployment and a significant drop in corporate income, this is not priced in – and the potential for further stock market declines, Miller believes.

– My personal opinion is that you are more likely to be disappointed than pleasantly surprised.

Miller notes, for example, that the probability of a recession has historically been highest during periods of sharply rising interest rates.

He believes there is a high risk of a deep and prolonged recession, because central banks are taking too much risk in their efforts to bring down inflation – inflation is so high and the impact of interest rate delays increases dramatically.

Admittedly, it varies between different countries.

Eric Bruce believes that in the US it is “highly uncertain” how weak economic growth will be in the coming year – while in Europe it seems “more certain” that there will be a recession, as do energy prices, especially if the winter is cold. , the purchasing power will be greatly reduced.

Macroeconomic numbers in Europe are still better than expected, and the job market remains tight. There’s a widespread perception that two quarters of negative growth are hard to avoid, Bruce says, but people were more pessimistic a couple of months ago.

– Something no one expected definitely happened

If you return more than that, to December 2021Stocks were generally private Expensive , Many central banks have viewed rising inflation as temporary, and the Fed has projected a total of three rate hikes in 2022.

“Nobody imagined” that Russia would invade Ukraine, and the tension was directed at what consequences the – now little thought of – Omicron formula might have.

Seven interest rate increases from the Fed and a completely unusual phenomenon with sharp declines in both the stock and bond markets later, plus the Ukraine war in the tenth month, is obviously hard to predict, especially about the future.

– When we talk about one year, something definitely happened that none of us expected. There are likely to be some very smart people who will get their estimates exactly right, Miller says, but the rest are likely to get it wrong.

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