Stand: 31.10.2022
After a very volatile start to the month, global stock markets ended October well in the green. Apart from the argument that a lot of bad news was priced in after the severe correction since the beginning of the year, there was little reason for optimism. High inflation numbers, coupled with strong labour markets (especially in the US), have kept the central banks on their hawkish trajectory, to the extent that a global recession can no longer be ruled out. The failure to find any solution at all to the Ukrainian conflict makes a recession in Europe even more imminent, as the energy crisis continues to intensify. This is likely the main reason for the European stock market underperformance. The European Central Bank announced new plans to tackle the energy crisis that included the first version of a price cap and a common purchasing system. These measures, together with 40 billion in new fiscal stimulus support, should help both households and businesses. With storage tanks full and autumn proving unseasonably warm so far, gas prices continued to move lower. While winter gas prices are down by about 60% from their August peak, they remain higher than the 2021 average.We continue to see rising interest rates and lower liquidity from the central banks, which are maintaining their very hawkish stances to fight inflation. The growing uncertainty around the impact of these high levels of inflation and high funding costs on the economy for 2023 is fuelling market volatility and wariness among investors who have been forced to maintain a high level of cash. This uneasiness is mainly being felt in Europe, where global investors are significantly underweight in European equities and where the EUR/USD is strongly oversold (when taken over a 20-year period). In this context, any good news is likely to cause a short squeeze. The overriding question is thus when the central banks will have the flexibility to cut their rates again and inject liquidity to support the economy. Since rates (and mainly US and German 10Y government yields) are driving the equity markets, this will be the main indicator for investors. We think that we are close to a long-term peak here and that we should see a global inflection point in the markets during 2023, in anticipation of a cycle of stimulus from central banks in 2024. In some cases, we are already close to distress levels for European small caps. Regarding styles, we have seen the market s focus shift from Value/Growth to Cyclical/Defensive biases. The next shift is likely to be towards Quality and EPS momentum. Our challenge for the next few quarters will thus continue to be to select the right companies that are able to benefit from an acceleration in their business in a more challenging macroeconomic environment. In Europe, we see a broad range of companies that can offer solutions to numerous megatrends, such as the energy transition, new health technologies, digitisation and the automation of the economy.