First half year expected to be better

Lower energy prices are currently having a moderating effect on inflation, and China's departure from the zero-covid strategy is providing relief in the markets, but especially among China's major trading partners. Thus, the first half of 2023 could turn out better than many expect. However, if core inflation (excluding energy and food) does not fall as well, policy rates are also unlikely to fall as quickly as many are hoping, and the second half of the year may be worse than the first.

The authors

DJE's team of analysts continuously monitors and evaluates the markets using the in-house FMM method according to fundamental, monetary and market criteria. They summarise their findings once a month.

From the analyst team of DJE Kapital AG

Review of 2022 and December 2022

The year 2022 was an extremely difficult stock market year. Both equities (MSCI World in USD -19.5%) and bonds came under greater pressure. The losses of longer-dated bonds were particularly pronounced. For example, the prices of 30-year US government bonds fell by almost 37%. In total, equities and bonds experienced the most loss-making year since 1871 (according to calculations by Nobel Prize winner Robert J. Shiller and the Financial Times). US mixed funds (portfolio: 60% equities/40% bonds) lost around -16%. December 2022 was also a very difficult month, with US stock markets in particular coming under greater pressure. Global equities (MSCI World) fell by around 7.7% on a euro basis. In contrast, selected DJE funds held up well in December:

Outlook: First half year expected to be better

After a very weak December, the markets have recovered well so far in January, especially in Europe. Drivers of this development included the significant drop in gas and electricity prices in Europe as well as China's abrupt departure from its zero-covid policy. We have a positive outlook for China and selected emerging market regions, such as Mexico, in 2023. Overall, the stock markets remain very inflation-driven: Currently, headline inflation in the US (but also in Europe) could initially come back more strongly than expected. It is conceivable that the expected final interest rate step by the Fed will not come, but that interest rate cuts will then take longer to come due to core inflation not falling as sharply. As a result, the first half of 2023 could be better on the stock markets than the second (consensus opinion is that H2 will be better than H1). Interest rates and valuations should also be important in 2023, so Europe and emerging markets could outperform the US. The investment ratios of our funds are currently relatively high; looking ahead to the next few weeks, we believe these high ratios are justifiable. Selected bonds remain interesting due to the significantly more attractive interest rate level.


  • Falling energy prices initially have a relaxing effect
  • More difficult for Germany and Europe in the medium term
  • China and selected emerging markets positive
  • Interest rate hikes do not necessarily lead to higher unemployment due to structural shortage of skilled workers

The economic outlook for Europe and also for Germany is somewhat better than it was at the beginning of December: due to the very warm winter so far, the situation on the gas and electricity markets has eased. The order books of European industry should fill up again, as inventories at many customers are very low. Some European companies are also likely to feel the increased US dollar only this year, due to hedging transactions. As a result, the eurozone economy could perform somewhat better in 2023 than expected in Q4 2022. Currently, the global automotive industry also seems to be developing quite well.

In the medium to longer term, however, it will remain difficult for companies in Germany and Europe. Medium-sized companies in particular are likely to have a hard time. Large, multinational companies will probably localise their resource allocation even more, i.e. invest more directly in the most important sales regions (USA/Asia).

China has made a 180-degree turn in its Corona policy by the end of 2022. The wave is already ebbing in the big cities and the Chinese economy should grow strongly from Q2. The government will continue to try to boost economic growth strongly. There should also be improvements in the real estate sector. Furthermore, Chinese are likely to travel a lot in 2023. Sectors such as basic materials or travel & leisure thus remain promising. We are positive on China and selected emerging markets in 2023.

Compared to other cycles, the US labour market could remain tight for longer than expected. The labour market in the US (similar situation in Europe) could be the big difference in this rate hike cycle, i.e., despite massive FED brake policy, the unemployment rate is expected to rise only slightly, as there is already a structural labour deficit in very many sectors / areas.


  • Already very optimistic inflation expectations
  • Core inflation likely to fall less than headline inflation
  • Central banks could stabilise higher interest rates
  • Bonds still negative overall, but selected high-quality bonds with attractive yields

US headline inflation should also decline in the coming months. In the eurozone, too, overall inflation is likely to fall initially because energy prices are falling. It is conceivable that the expected final interest rate step by the Fed will not come, but that interest rate cuts will then be a longer time coming due to core inflation not falling so sharply.

However, the market's future inflation expectations are already very optimistic or aggressive. Deutsche Bank, for example, expects headline inflation in the US to be only 2.6% in June 2023. Core inflation is likely to fall less sharply than headline inflation. Inflation components such as housing costs (shelter) or services are not likely to come back as quickly.

We do not think it is appropriate to be too optimistic about rapid interest rate cuts in the second half of the year. The Fed and the ECB will probably first try to stabilise interest rates at a higher level before considering interest rate cuts.

Quantitative tightening and a lack of interest rate cuts in the second half of the year or interest rates at higher levels for longer than expected could lead to a further correction in the course of the second half of the year.

Historically, the development of the money supply has always been the best stock market influencer: the US money supply M1 is currently no longer growing and US excess liquidity is negative, i.e. there is currently too little excess money for equity investments in the economic cycle.

For bonds as a whole, sentiment remains negative. On the bond side, however, we see opportunities, as one can still find top-rated bonds (e.g. AA or A) with attractive interest rates. German government bonds, on the other hand, remain unattractive. Overall, 2023 could be a good bond year.



  • Euro initially benefits from "hawkish" ECB
  • US dollar stronger in the medium term

The euro could initially continue to benefit from more "hawkish" statements or steps by the ECB, i.e. announcements or actual interest rate hikes. In the medium term, however, we still expect the US dollar to strengthen: The US is largely energy self-sufficient, a technological leader in many areas, significantly less bureaucratic and has the strongest and deepest capital market.


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