The market saved the furniture… for huge amounts… – 01/02/2023 at 15:42

Arnaud Riverain

"2023 may look like 2022 with a cautious first half and a more optimistic second half.  Finally, 2024 could be the year of the return to normalcy..." (credit: Adobe Stock)

“2023 may look like 2022 with a cautious first half and a more optimistic second half. Ultimately, 2024 may be the year of the return to normal…” (credit: Adobe Stock)

Last year at the same time, we were talking about doubts here and there within the market that were starting to emerge because of the mention of the return of inflation and we haven’t even talked about the increase in the cost of energy. So it seems plausible to us to experience moments of correction, markets hate uncertainty, especially after experiencing an exceptional year 2021 in terms of stock market performance.

We didn’t quite believe it and although we were rather “bear”, the corrective movement lasted over time as we expected more jolts. So, at the end of September, we can officially speak of a “bear market” with declines of more than 20%. The trigger took place in January with numbers not seen in terms of inflation in the USA for 40 years and in Europe for 20 years. Added to this is the Ukrainian crisis which, in addition to the geopolitical tensions it causes, has accelerated the problems we face in terms of energy prices. Finally, the zero covid policy implemented in China has come to this point. On the other hand, the corporate results were quite good and did not generate any surprises.

Perhaps this element allowed the market to bounce back sharply in October and November with growing hopes that central banks would become less aggressive in their rate hike policy. Operators are even hoping for worse than expected indicators in terms of growth to prove this hypothesis. However, their hopes are quickly dashed because if the rate hikes are less drastic in their pace than they are now, it is a safe bet that it will last longer. In the end the result will be the same and it confirms the fact that we have entered a “long” period of inflation. The alpha and omega of the central banks is now to destroy this inflation to return to a level of around 2% even if this should lead to a phase of recession, a phase that, in our view, is inevitable.

Ultimately, the markets ended the year sluggishly saving the months of October and November. Businesses are held. The first signs of lower inflation are being felt in the USA but as far as Europe, as usual, it is lagging behind.

In terms of indexes, the CAC 40 has done well and the lower the rating, the worse the performance. This is quite logical because, to repeat, in a falling market, small underperforms. Furthermore, in an environment where inflationary pressure is setting in, their ability to pass on its impact is more limited than the coastal behemoths, which also benefit from luxury values, for example.

Index performance

Source: Nyse Euronext.  As of 12/31/2022 after market close

Source: Nyse Euronext. As of 12/31/2022 after market close

Consensus

A little like for the evolution of the indices, the more the rating drops, the more important the downward changes. Overall, this is quite logical as they are more exposed to “inflation” risk due to their lower capacity to pass on the resulting increase in costs.

Importantly, we see the expectation of a decrease in the results of the CAC values ​​for 2023. Inflation has certainly passed through this. As usual, Small still posts somewhat optimistic estimates, and we can expect frequent downward revisions. This element can be punishing, especially in the early part of the year.

EPS change estimates

Source: InFront, as of 12/31/2022

Source: InFront, as of 12/31/2022

Appreciation

In absolute terms, the market seems to be at interesting price levels that offer entry points. Although we can expect downward revisions of the results, this can be a support factor or at least a factor that allows to position oneself in a decline in an opportunistic way.

Valuation of indices

Source: InFront on 12/31/2022.  Median values

Source: InFront on 12/31/2022. Median values

Conclusion

One of the keys, indeed the key, is to know at what level central banks will stop their rate hike policy. They will climb faster but longer, remains to be seen how far and for how long? The future evolution of markets depends largely on these two elements. In fact, once this threshold and the horizon are set, they have only one thing in mind, the rise in rates is over, the fall is coming, which is “comforting” for them and above all it means that the worse is over.

Before we get there, we will certainly experience a difficult first half in Europe which will “really” suffer the impact of rising energy prices along with rising credit costs. The first half of the year will therefore be marked by announcements of recession or near-recession in such and such a zone, which, ironically, will be seen well as it could be a prelude to a change in the centrals’ restrictive policies that bank. Add to that all the uncertainty associated with China’s reopening that could fuel inflationary pressures due to increased demand from the world’s second-largest economy for oil and raw materials. In short, the first half will be littered with pitfalls but a consensus seems to be emerging that we are nearing the exit tunnel.

As for the company’s results, since things have been going well so far, especially for large caps, we shouldn’t have any bad surprises for Q4. For small caps, it is another story and downward swings may continue. The rest will be more complicated because the base effect is less desirable. This element, added to the already gloomy macro-economic environment, will be an additional factor weighing on the indices. In any case, we bet that for almost everyone, the 2023 estimates will be revised downwards.

S1 is therefore at risk and, in our opinion, it should only be from S2 that we should recover more tranquility or at least visibility outside of exogenous events.

Also, 2023 may look like 2022 with a cautious first half and a more optimistic second half. Finally, 2024 could be the year of the return to normalcy…

With these beautiful words, we wish you a wonderful and happy new year 2023 😊

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