“More chaff will be separated from the wheat on the stock exchanges”

Trade wars, a pandemic, supply chains that are in turmoil, war in Europe's backyard, sky-high inflation, fear of recession, etc. The list of challenges just keeps growing recently. This time it's different, is something you often hear said during a crisis period. Is the current cocktail of crises really any different?

“The world (economy) has made significant progress in recent decades,” says Colin Graham, Head of Multi Asset Strategies at Robeco. "With the end of the Cold War, a huge amount of money that was no longer being pumped into defence and border surveillance, was freed up to go instead into society and the economy. At the same time, globalisation has raised more than a billion people out of extreme poverty in the last 25 years. Economic growth during this period was also driven by low input costs, cheap labour and energy. Finally, over the years, the central banks have stepped in with measures to prevent serious recessions," he says. "However, we shouldn't let ourselves be carried away and think that the world has completely changed now because of what has happened in recent years. There are more risks, that’s for sure. But we need more time and evidence before we can be certain that we are in a new or different era."

What did you do with your money/investments in 2022? How are you yourself positioned for 2023 and the next few years?

"At the moment, I am cautiously long on risky assets. Cautiously, because the fear of a global recession casts a shadow over 2023. Cautiously also, because equity markets are currently not pricing in a slowdown in corporate earnings growth," continues Colin Graham. "With valuations at best expensive compared to fair value, I am currently looking mainly at companies that can post sustainable earnings growth and companies that manage their capital in a disciplined manner. Value and quality stocks can act as a shock absorber to help soften a broader decline in equities in the near future."

"In addition to fears of recession, there are other issues we will pay attention to in 2023: the strong US dollar, inflation and key interest rates. Vigilance remains the watchword anyway, as central banks are still saying that interest rates will remain higher for longer."

Investors are facing up to a large number of risks, is it wise to invest at all?

"In the short term, the best strategy may well be to stay on the sidelines. However, in a climate of high inflation, your purchasing power is eroded if you stay in cash. Putting your money to work with professional investors who can demonstrate a solid track record is one alternative."

What do you expect to see happening to inflation?

"In both 2021 and 2022, inflation forecasts turned out to be inaccurate. Companies have been able to increase their prices and increase their margins so far, but the spiral effects could be more dangerous," Colin Graham predicts. “For example, wage increases – driven by inflation – could squeeze companies’ margins more sharply, which will in turn push prices up even further.”

Europe, the US or emerging markets: which region do you prefer?

"The price/earnings ratios of European shares are currently very low compared to US shares. Asian shares are also attractively priced. A (potential) further reopening of China would boost economic activity in Asia considerably, but could also increase inflationary pressure in a world where commodities are still scarce. The US dollar is also important in this. A weakening USD gives emerging market equities and bonds room for an upside potential."

One final tip?

"For years, TINA has been the slogan among investors, in other words There Is No Alternative. This meant that we were better off not wasting our time investing in any asset classes other than equities. In the meantime, TINA has given way to TARA, There Are Reasonable Alternatives. Yesterday’s solutions that were mainly equity-based are no longer the only solutions in town."

"Finally, the end of the “free money” (zero interest rate) era may mean that share prices will increase at variable rates. As a result of the flexible monetary policy, shares have risen more or less in unison over recent years. Now that interest-rate policy has tightened, more chaff will be sifted out from the wheat. That will make active and selective management even more important."

The content of this article was prepared by Robeco on 21 December 2022. The views expressed in this article (and in particular the statements between quotation marks) are those of the author and not those of Keytrade Bank. This communication does not constitute investment advice or a recommendation, nor is it a financial analysis. No part of this communication may be interpreted as being information with any contractual value of any kind whatsoever. This communication is for information purposes only. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analyses that may turn out to be incorrect. Keytrade Bank cannot be held liable for any decision of any kind taken on the basis of the information included in this communication, nor for its use by third parties. Please seek more information before investing in financial instruments. This includes carefully reading the document "Overview of the key features and risks of financial instruments" in the Document Centre at keytradebank.be.