After the storm always comes the calm. That is the feeling that investment fund managers have in Spain. After having closed the worst financial year in history, with an average depreciation of 8.7%, the start of 2023 is being very strong. So much so that many do not end up believing it. Until January 24, the funds have made their best start to the year in a decade, adding an average return of 2.37%.
“It has surprised us all. Almost everyone was anticipating that the stock market rises would arrive in the second half of the year but they have come suddenly”, explains Luis Artero, head of investments at JP Morgan Banca Privada.
The push for funds has not come only from the Stock Market. After a dismal year in fixed income investing, bonds have taken a breather. And vehicles that invest only in this asset have rebounded by 1.3% so far this year.
What conditioned the evolution of the financial markets in 2022 and what is marking the start of this year is the same factor: inflation. It was just over a year ago when the United States Federal Reserve decided to start raising rates at full speed to cool the economy and stop price rises. The ECB followed.
Factors for hope
- China. The Chinese government’s decision to leave the Covid 0 policy behind has been a boost to the price of many companies that are highly dependent on exports to the Asian giant. Countries like Germany sell almost 20% of their exports there. In addition, the end of the restrictions makes it more unlikely that there will be bottlenecks in the supply chains again.
- Gas. For months, one of the great macroeconomic fears was the great dependence of several European countries on Russian gas. However, the change of suppliers has been much faster than what the market predicted. Norway or Qatar have replaced the Russian supply. In addition, the start of winter has been much milder than average, which has allowed gas reserves to be well above what was forecast.
- Recession. Until December, most analysis houses discounted that both the United States and Europe would enter a recession, but this has not been the case.
This turn in monetary policy, together with Russia’s invasion of Ukraine, was a jug of cold water for the stock markets and for bonds, but little by little it has been achieving its objective of containing inflation.
For most experts, the spike in prices is behind us and little by little it seems that the problem has taken hold. That makes the market consensus even expects the Fed to lower rates in the second half of the year.
At this time it can be seen how the macroeconomic data clearly shows the slowdown that the central banks have pursued, but this cooling coincides with a good moment for the stock market. Hugo Ferrer, GPM portfolio manager, recalls that “employment data or GDP growth reflect the evolution of the economy a few months ago, they are like a rear-view mirrorwhile what the stock markets collect are the earnings expectations for the coming months, so they look to the future”.
Not only the containment of inflation explains the good moment of the Stock Market. Víctor de la Morena, investment director of Amundi in Spain, believes that there are other factors that have helped: “In Europe, winter is being very mild, which has taken a lot of pressure off gas inventories and, furthermore, the reopening of the Chinese economy can greatly benefit other countries.”
Despite the good start to the year, all the managers call for caution and underline the important challenges that still lie ahead. Alfonso Benito, investment director of Dunas Capital, points out that the probability that monetary policies fulfill their purpose perfectly “is not null, but it is very low”.
The ideal would be to kill inflation without doing much damage to the economy, as seems to be happening for now. But the normal thing is that there are accidents along the way. Benito recalls that “the war in Ukraine is not only not ending but is escalating” and shows his doubts about price containment. “We cannot simply rule out that inflation will pick up again in the second half,” acknowledges the Dunas Capital expert.
