The Ukraine war and rapidly rising interest rates have caught investors off guard. The recovery from the historic shock could take longer than many hope.
The shares of the electric car manufacturer Tesla experienced a sudden crash in 2022. They lost three quarters of their value within a year.
Investors have lost a lot of money on the stock markets over the past year. Important share indices from New York to Zurich to Shanghai have lost double-digit percentages in value. Even conservative stocks such as the Swiss blue-chip stocks Nestlé or Roche had to post significant price declines.
Some things are reminiscent of the bursting of the dotcom bubble at the turn of the millennium: Highly valued shares such as those of the electric car manufacturer Tesla have lost three quarters of their market value within a year. Risky markets like those for cryptocurrencies are on the brink. Wherever possible, investors flee the risk. IPOs are a rarity, and startups that have recently been inundated with capital are struggling to find financiers.
The contrast to the era of low or negative interest rates, when stock markets were flooded with cheap central bank money, could not be greater: while capital was plentiful and corporate profits continued to soar, the year 2022 was one of record-high inflation, an unprecedented one Rise in interest rates and falling stock markets.
No place to hide
But even on the conventional capital markets there is currently hardly a safe place. Not only the stock markets, but also the supposedly safe bonds offered hardly any protection in times of crisis. The drastic, rapid increase in interest rates by the central banks automatically led to higher yields and thus lower bond prices. The fact that both stocks and bonds lost more than a tenth of their value at the same pace is a phenomenon that has not been observed in the USA for 150 years.
This sometimes spoils the business model for professional investors. The division into 60 percent equities and 40 percent debt securities, which is widespread among asset managers, does not guarantee that a portfolio will retain its value. Even gold, the classic investment for times of war and crisis, was only able to shine temporarily with value stability this year. Geopolitical uncertainty and rising interest rates have pushed all asset classes down almost without exception. Diversification doesn’t seem to have done much in the past stock market year.
“If 2022 was bad from an investor’s point of view, 2023 will definitely be better,” one is inclined to think. There is little evidence for this. Too many trouble spots are weighing on the mood on the markets: inflation is still at a very high level, economic development is uncertain, the Ukraine war is unresolved and the consequences of the lifting of the Covid restrictions in China are unpredictable.
Downside of opening up to China
Events like the opening of China appear positive at first glance. This should give Chinese stocks and tourism a boost in the short term. But there is a downside. The revival in Chinese demand should lead to rising commodity and energy prices, which in turn will fuel inflation. And as long as inflation is not under control, central banks will continue to raise interest rates. The more interest rates rise, the greater the downward pressure on the stock markets.
There are also fears about the economy. Almost all market observers are now assuming that both the United States and the euro zone will slide into recession in the new year – or are already in one. Even if the economic downturn is temporary and brief, the mix of rising interest rates and recession is poison for the stock markets. Especially since analysts’ expectations for corporate earnings are still based on a favorable scenario.
Share valuations are not cheap even after the significant price declines. Losses in popular tech stocks like Apple and Microsoft are more than a quarter compared to the beginning of the year, and Amazon and Tesla are more than half. Nevertheless, the papers are no lower than before the Corona-related price slump in spring 2020.
This also applies to popular Swiss titles such as Lonza, Sika or Straumann. If interest rates continue to rise, there is still downside potential, with the shares of highly valued, high-growth companies suffering particularly from the interest rate regime. Unless there’s a prospect of rates stabilizing or falling, there won’t be much upside in tech stocks.
Strong nerves
Investors would therefore do well to focus on conservative sectors such as consumer goods or healthcare in 2023 as well. Stocks with substantial dividends can also compensate for a lack of growth prospects and hold their ground in an inflationary environment.
The same applies to the papers of energy and raw materials companies. While they’re on the no-go lists of the sustainability-conscious, they should have another good year ahead given the energy woes. However, these investments remain subject to major political risks and are very volatile.
Crypto investors will also need strong nerves. The price of Bitcoin fell again after the FTX trading platform went down in November and is currently around 15,000 francs. Since the beginning of the year, 65 percent of its value is gone, other cryptocurrencies have fared no better. The pressure on the industry, especially from the regulators, will increase, and there will be no funding for new blockchain projects. Crypto will survive the FTX shock, but the crypto winter will drag on.