The world and the USA
The first half of 2023 is marked by bulls on the markets. World stocks followed up the successful start of the year with an even better second quarter. The MSCI World global stock index gained +5.9% in the second quarter and +14.1% since the beginning of the year. Investors’ optimistic mood was primarily driven by positive macroeconomic news and new technological trends. It thrives primarily in developed markets – the USA, the Eurozone and Japan. On the contrary, developing markets, led by China, are lagging behind.
The grouping of the 500 largest US companies by market capitalization, the S&P 500 index, gained +8.3% in the second quarter, following on from a strong first quarter (+7%). Even better is the technology index Nasdaq Composite, which gained +11.2% and during the year already +29.9%. On the contrary, the industrial index Dow Jones 30 lags behind, gaining only +2.9%.
The United States responded promptly to rising inflation, and the Fed raised interest rates the fastest in history. As a result, year-on-year inflation slowed to 4% in May. The American Fed is forecasting two more interest rate increases of 0.25 percentage points in the coming months, which could bring the interest rate to the range of 5.50 to 5.75%. Subsequently, the rates should stabilize and gradually decrease. The US is handling the period of rising rates surprisingly well. Unemployment remains low and the economy avoids recession.
The Eurozone is behind. Interest rates started to rise later than in the US, so inflation is more of a concern. It should not be forgotten that the energy crisis hit the “old continent” much more. Inflation in the eurozone slowed down to 5.5% from 6.1% in May, which is still almost three times the set target of 2%. Rising wages and low unemployment prevent a more significant slowdown in price growth. These factors maintain a high demand for goods and services. In 2024, however, the growth of consumer prices should slow down to 3% and in 2025 to 2.3%.
As a result of persistent inflationary pressures, the ECB must continue to raise interest rates. The next increase is expected by another 25 basis points already in June to 4%, which is the highest level since the financial crisis in 2008. Analysts expect the ECB to increase interest rates twice by 25 basis points. In July to 4.25% and in September to 4.5%. Interest rates could begin to decline in 2024 and reach 3% in 2025. Investors were not too disturbed by the fact that the Eurozone fell into a technical recession in the 1st quarter of 2023. This is because it is very moderate and economic growth is expected again from the 2nd quarter.
Thanks to the surprisingly strong resilience of the European economy, local stocks are also doing well. The pan-European Euro Stoxx 50 index rose by +0.9% in the 2nd quarter and by +14.8% since the beginning of the year. British stocks are worse off. The German DAX reached a new historical high in June and gained +14.8% for the entire half-year. British stocks are worse off. The FTSE 100 index lost -2.1%, or +0.6%. Great Britain is coping with “Brexit” with difficulty.
Japanese stocks took a long time to shine. During the quarter, the Nikkei 225 index rose to its highest level in the last 3 decades, gaining up to +18.5% and up to +27.4% since the beginning of the year. Several factors contributed to the excellent performance of Japanese stocks. The weakening yen against the dollar can be considered key, as well as W. Buffett’s investment in the local stock market. But other factors also helped, such as reforms in the field of company management, low volatility and valuation of shares, respectively. low interest rates in Japan.
In Asia, Chinese shares are writing a completely opposite story. The Hang Seng index lost another -7.2% of its value during the quarter and -4.3% for the whole year 2023. Investors avoid China primarily because of geopolitical risks, which are the questionable direction of communist ideology, support from Russia, but also the trade war with the USA. But economic factors also play a role. China is recovering from anti-pandemic measures much more slowly than expected.
Artificial intelligence is the main engine
In terms of sectors, stock markets are primarily driven by technology. In recent months, we have witnessed the mania surrounding artificial intelligence (AI). Generative AI, which took the world by storm mainly in the form of ChatGPT from the OpenAI fund financed by Microsoft, could be, according to many, a similarly important milestone as the invention of the Internet or smartphones. Companies promise significantly higher efficiency, cost savings and profit growth from AI. Not wanting to miss this opportunity, investors turned their attention to technology stocks.
Microsoft shares have gained +42% since the beginning of the year. Other large technological events are not far behind in terms of performance. Alphabet (+34%), Amazon (+52%), Apple (+55%), Salesforce (+57%), Meta (+130%), Tesla (+142%), Nvidia (+196%) and Spotify ( +207%).
For the time being, mainly large companies are benefiting from positive macroeconomic news and new technological trends. Low capitalization stocks are lagging behind in their performance. The Russell 2000 index, which combines stocks with small capitalization, achieved a record low valuation in relation to the highest valued stocks (S&P 500). This is mainly due to the fact that financing becomes more expensive for companies in times of high interest rates. Investors thus prefer established companies with high profits over smaller companies without constant profits.