Opinions about the course of the market are divergent for 2023. Some express their concerns about the stubbornly high inflation rate while others air concerns about a potential earnings recession. As of now, it appears that the earnings recession will have a greater relative impact than the high rate of inflation which start devlining now.
We think that the grueling bear market experienced in 2022 is not totally over and that another leg down could unfold. As for now, equity risk premium is still relatively low. The long-term average is between 350 and 400 basis points (bp), while at the moment it oscillates between 200 and 250 bp. In absolute terms this translates as relatively lofty valuations and investors are not being appropriately compensated for taking equity risk when compared with a fixed-income opportunity.
In recent weeks, it has become clear that companies announcing lower EPS results (versus forecast) and lower future estimates, correct between 10 % to 15 % (in some cases even more). When such event has occurred, statistically speaking, it takes normally between 3 to 4 months for the share price of the said company to normalize and company to provide ample information about the way forward that should recreate increased level of investor confidence.
Nevertheless, we think that it is an opportune time to establish a shopping list with a view to picking-up either opportunity. We are convinced that risk averse patient investors will get remunerated handsomely with the following ideas, including exposure to developed and emerging, small, medium, and large caps, as well as cyclicals and non-cyclicals. The more risk opportunistic investors should consider opportunities in the field of robotics and automation, reshoring, infrastructure requirements to achieve CO2 neutrality, and semiconductors. In particular this last segment has underperformed the market lately and we should see at any time a catch-up movement.
Download here the investment list for 2023 and beyond.