GRIMALDI & PARTNERS: Equities – Will the rally at the start of the year continue?

By Silvano Grimaldi, CEO Grimaldi & Partners

Zurich – After a strong start to the year, the stock markets are consolidating. The bankruptcy of the American Silicon Valley Bank and the major Swiss bank Credit Suisse, which got into trouble, brought back memories of the 2008 banking crisis. What are the prospects for the stock markets for the coming months? Silvano Grimaldi, CEO of the independent asset management company Grimaldi & Partners AG, gives you the answer to this question.

Stock markets up to date
Stock investors have had reason to be happy in recent months, and the recovery in stock prices is likely to continue. The main argument in favor of this assessment is that some of the economic risks that weighed on share price development have diminished. In many national economies, only weak economic growth is expected for 2023. Investors are obviously weighting the economic prospects, which have improved again, and the slowly declining inflation rates more than possible further interest rate hikes by the central banks and the resulting economic risks.

Hopes of an end to interest rate hikes, high dividend yields and increased share buybacks are supporting the price recovery. In the past year, not only in the USA but also in Europe, many companies bought back more of their own shares than in previous years, and further buybacks have already been announced for the current year. With the buybacks, the companies are reducing the supply of shares in order to be able to distribute profits and dividends over fewer shares. Buybacks also lead to higher prices and around a quarter of the price gains in the US and Europe are likely to be attributable to them.

Fighting inflation remains a priority for the Fed, ECB and SNB
The question of whether the further interest rate hikes planned by the central banks can actually achieve the desired goals without impairing economic growth and employment has not yet been definitively clarified. Experience has shown that there is often a good year between the beginning of a slowdown in economic activity due to monetary policy measures and a significant increase in unemployment.

The economic prospects are improving
Most of the global economic slowdowns will be less severe than feared for a long time. A slightly higher growth rate compared to the previous year is therefore expected for the global economy.

Bonds
If the cycle of rate hikes ends in the current year, investors should now be interested in new bonds and no longer only in bonds with high yields to maturity. Many bonds now enable relatively high current nominal yields – even taking exchange rate risks into account – and price gains after peak interest rates have been exceeded.

Equities
Many of these companies have already responded to falling earnings, falling profits and pressure from investors. They try to improve their profitability not only by laying off workers, but also by adapting their business models. Shares in well-positioned companies from the technology sector belong in a long-term portfolio, despite the fact that valuations are still high in some cases.

Sustained price increases can only be expected after the earliest clarifications on further developments in interest rates and the economy, which are to be expected in the autumn.

Risks and opportunities
Temporary price setbacks due to newly emerging risks can never be completely ruled out. The recent bankruptcy of Silicon Valley Bank and UBS's takeover of Credit Suisse have dampened investor sentiment in the near term. However, the banking sector is much healthier today than it was in 2008 during the financial crisis. There is no reason not to buy stocks because, at the end of the day, future profits are traded in the stock markets. The prospects in this respect have not deteriorated despite current concerns in the banking sector.

The stock markets often remember such truisms even before temporary risks have passed. Prices then rise unexpectedly quickly for many investors. This makes the timing of investment decisions so difficult. Investors should therefore not allow themselves to be influenced by possible geopolitical crises or world events and stick to their investment strategy. Temporary price setbacks should be used to buy quality stocks at lower prices.