Rates and recession: European stock markets face a difficult start to 2023

Rates and recession: European stock markets face a difficult start to 2023

Tightening financial conditions and the prospect of an economic recession are set to be a toxic breeding ground for European stocks heading into 2023, with a key regional benchmark slipping towards October lows, according to a Reuters poll.

The survey of fund managers and strategists, surveyed over the past two weeks, predicts that the equity benchmarkSTOXX 600It reached 408 points in the middle of next year, which represents a fall of almost 8% compared to last Friday’s close.

Although Europe has joined a recent recovery in global stock markets, fueled by hopes of a pause in interest rate hikes in the United States, the STOXX 600 remains on track for its biggest one-year drop since 2018, down about 10% so far in 2022.

“The impact of aggressive rate hikes will be felt in the real economy and, therefore, in the growth of corporate results in the coming quarters. Based on our economists, we expect a shallow recession in Europe, leading to forecasting a 12% decline in results” next year, said Emmanuel Cau, strategist atBarclays (LON:BARC) in London

The index could recover in the second half, helped by expectations that rates will peak, and reach 434 points by the end of 2023, 1.5% less than at Friday’s close and more than 12% of the historical maximum reached in January, according to the survey.

“Higher risk premia across asset classes will eventually reach a tipping point, where a shift towards more return-oriented investments will be warranted,” says Tomas Hildebrandt, portfolio manager at Evli in Helsinki.

“Things could change, for example, if the inflation outlook starts to improve significantly or if at least a ceasefire is achieved in Ukraine.”

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For the coming months, however, investors fear that euro area equities will lag behind other markets. The region’s economy is seen as particularly vulnerable, given an energy crisis exacerbated by the war in Ukraine and the European Central Bank steadily raising interest rates to combat price pressures in the bloc.

“The economic outlook looks tough as our economists foresee a recession in the euro area,” said Marc Haefliger, head of global equity strategy atCredit Suisse (SIX:CSGN) in Zurich.

“We expect corporate results to deteriorate and expect the region to trade lower on our tactical horizon. The economic slowdown will disproportionately affect cyclical values in the euro area,” he added.

The STOXX index of the top 50 euro area stocks is forecast to fall another 7.9% from Friday’s close to 3,650 points in mid-2023. It should remain anchored around that level over the next year, before rebounding in early 2024.

Money markets expect ECB interest rates to rise by more than 150 basis points by the end of June.

Among the benchmarks of the countries of the region, theGerman DAXIt will end the first half of 2023 at 13,209, 9.2% less than at the end of Friday. TheCAC 40French and theFTSE MIBItalian will fall more than 15% and theIBEXSpanish 17%.

TheFTSE 100British will stand at 6,700 points in mid-2023, 10.5% less than at the end of last week, but by the end of 2023 it should rise again to 7,373 points.

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