We finally close 2022, a year that is not particularly well remembered by the asset markets but which, to a large extent, has valued (financially) the effects derived from the Covid crisis, in the first place, and the war in Ukraine, as a contributing factor.
In general terms, the essential guiding axis of the year has revolved around inflation and the response that the central banks have given to it. Macroeconomically, what we have seen have been uncontrolled rising prices, especially until well into the summer (when raw materials began their downward path), underlying inflation that even exceeds the general CPI in many countries (this aspect is not especially positive ) and an increase in economic activity clearly below 2021, but without even coming close to collapsing.
From the point of view of markets, this baseline scenario has turned into a collapse in bond prices, derived from increases in interest rates or, even better, from the expectations generated by central banks regarding increases in rates, and a general decline in equities, albeit unevenly across sectors and countries (with value faring significantly better than growth). In other words, the markets have anticipated a more complex macroeconomic world, characterized by high rates and much more moderate growth, the result of which has been a negative year for stocks and bonds.
At this point, it should be remembered that the financial markets are a very estimable source of prediction of future macroeconomic developments. That is to say, they usually put the general economic state in present value, a few months away. In this sense, the general poor performance of almost all the indices in 2022 indicates an economic reality, at the street level, that is very complicated for 2023. How complicated is something that, in fact, we are in the process of elucidating.
The paradox, in this case, is that the new year, which could be a very tough year from the point of view of the real economy (significantly tougher than 2022), might turn out to be a much more positive year, from the point of view of In view of the financial markets: there is no doubt that inflation is going to remain high, and that the centrals are going to continue raising rates. But the key is that financial agents begin to discount the end of the rate hike cycle. This would have a clear easing effect on the debt curves and, therefore, would induce fixed income, in general, to a positive movement in terms of valuation (fall in returns). In this sense, bonds can be an excellent investment alternative, as long as they remain in areas of high profitability.
As far as the stock markets are concerned, this probable drop in yields will also have a positive effect, in terms of progress in normalization. However, in the case of equities, the determining factor will be the depth of the economic slowdown (a euphemism for recession) which may upset expectations of corporate earnings. There is no doubt that the current stock markets are already picking up part of this slowdown. But if the economic deterioration is higher than expected, it is very likely that the stock markets will, at some point, carry out some type of significant correction. Let us remember the words of the Fed in the sense that high inflation is removed by inducing the economy into a recession. Therefore, at least in these first months of the year, be very careful with the actions. It is possible that the greater macro stability starting in the summer shows a better scenario for this type of asset.
For all these reasons, the friendly speaker will have reached the conclusion that 2023 could be exactly the opposite -the inverse image- of 2022: a worse macro year, in an absolute sense, but a better market year, within this main scenario that we have drawn Naturally, the degree of uncertainty remains very high, and the “error” terms in the Gauss probability curve have widened. Without going any further, a resolution of the conflict in Ukraine would change a good part of this basis or, more precisely, of the expectations of the agents on the supposed basis.
Likewise, a lesser deterioration of the economy in a context of sharp reduction in inflation can be equally beneficial. On the other hand, stubbornly stable CPI data in high areas may delay this better framework for the markets. In this sense, maximum monitoring of macro news, especially prices and growth, and the factors that contribute most decisively to these variables, that is, employment and consumption.
