The attractiveness of debt and the outlook for interest rates and inflation maintain uncertainty in equities. The long-awaited rally at the end of the year is not ruled out, but it is not guaranteed either. It will depend on what several key data transmit, analysts point out, and that there are no surprises such as the conflict in Israel and Palestine that broke out over the weekend.
The first section of the exercise was positive, the second has gone wrong. “Since August we have experienced a change in bias for the worse. The market has tried to put a price on the fact that rates will be higher than expected or that they may even rise a little more,” explains Pedro del Pozo, director of financial investments at Mutualidad de la Abogacía. Although end-of-year rallies and other seasonal patterns “are overvalued by the investor,” for Alejandro Vidal, head of investment advisory at Deutsche Bank in Spain, “in an environment of weak growth but not recession, and interest rates that should have peaked, there is room for stock markets to rise again. This makes us see the current declines as buying opportunities.”
There are certain factors that will mark the pace until the end of the year, explains Del Pozo. One, that the earnings season that is coming up these weeks is positive, especially in the projections that companies give. Another, a slowdown in the macroeconomy, moderating inflation and reducing pressure on central banks and fixed income. To get something clear, perhaps we need to wait. “We will have a better idea at the end of the month. “You have to pay attention to macro data,” he warns, such as the direction of American employment. “It can happen, there is a good possibility of an improvement at the end of the year, but the conditions must be met,” he insists. Much trusts the results: “They can have a significant impact whether they are upward or downward,” warns Vidal.
If it happens, how far can the market rebound go? Franco Macchiavelli, head of analysis at Admirals Spain, points to the annual highs as a reference, both here and on Wall Street. In the Ibex 35 he was around 9,700 points. From current levels, the revaluation potential would exceed 5%. “To appreciate a rally to these levels, good results will be considered, the central banks confirming the pause in the rate hike and inflation data confirming a slowdown. “They would be enough reasons to see a Christmas rally,” he says.
If everything works out, both Europe and America offer opportunities. With greater strength, the US starts in a better position for Bank of America analysts. “It has clearly exceeded expectations,” with a “faster and more robust” post-Covid recovery. The European awakening after the pandemic “is far from stellar,” they state in their reports, with a greater impact from the energy shock due to the war in Ukraine.
As always, splitting hairs pays off. Among the sectors that may benefit, at Deutsche Bank, again influencing a panorama without recession, they point to consumption, such as communication services in the US or cyclical consumption in Europe (luxury, cars, retail, leisure, tourism and media). They see a “quite attractive valuation.” High rates would also benefit the European financial sector, says Vidal. Del Pozo agrees on banking and points to technology companies when there is a rate drop, something that the market will discount before it happens. At Admirals they affirm that sectors that have not been very popular this year, such as health, infrastructure, defense or stable consumption, can be rewarded.
