CIO Insights Resilience versus recession For the stock markets, this could mean that the revaluation following the recent large interest rate hikes have now more or less ended. A high valuation phase due to very low interest rates has been followed by a low valuation phase, and we are currently transitioning to a medium valuation phase for the years ahead. While this is no indication that 2023 will be a great year for stocks, we do expect solid price increases in the single-digit percentage range. Stocks therefore remain a particularly interesting asset class and essential components in a diversified portfolio. Nonetheless, we believe that short-term and even substantial price fluctuations could occur at any time during 2023 given investor caution, analysts’ continued overestimation of profits in some cases and the many political and economic risk factors. Market participants may continue to react strongly, even to less significant news. Although defensive sectors could continue to outperform over the medium term, valuations now look rich. Sectors that are more cyclical and value-oriented in nature appear attractive to us. Financials, materials (ex. chemicals) and energy stocks in particular are trading at depressed valuation levels on a historical comparison. Investors wanting to position themselves more defensively may want to consider healthcare stocks. The sector offers above-average earnings growth supported by strong secular trends at a reasonable price. In regional terms, one investor focus in 2023 could be Europe. Recent valuation discounts in this region have been disproportionately high, with economic and geopolitical risks already factored in. Extensive fiscal programmes and high levels of savings should buoy private consumption, and expected stronger Chinese growth will be important to many European companies. The U.S. stock market will of course remain the focus, but its technology bias, and the resulting greater sensitivity to interest rate movements, may lead to greater investment risks, as could the expected weakening in the USD. Figure 10: Equity index forecasts for end-December 2023 Source: Deutsche Bank AG, Forecasts as of November 18, 2022. United States (S&P 500) 4,100 Germany (DAX) 15,000 Eurozone (Euro Stoxx 50) 4,000 Europe (Stoxx 600) 445 Japan (MSCI Japan) 1,250 Switzerland (SMI) 11,150 United Kingdom (FTSE 100) 7,600 Emerging Markets (MSCI EM) 990 Asia ex Japan (MSCI Asia ex Japan) 625 Australia (MSCI Australia) 1,450 Among the emerging economies, Asian markets remain the most attractive. Strong capital flows to “safe havens” caused marked declines in valuations in northern Asian markets, such as South Korea, Taiwan and China in 2022. The average drop in these markets was around 20%, a trend that has now been partly reversed. These markets may make a comeback when the macroeconomic environment and investor sentiment improve. In recent months, the Indian stock market has performed well despite volatility. Corporate EPS is currently forecast to increase by around 17% in 2023 although the Indian market’s 12-month P/E ratio of around 20 is comparatively high. In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Performance refers to a nominal value based on price gains/losses and does not take into account inflation. Inflation will have a negative impact on the purchasing power of this nominal monetary value. Depending on the current level of inflation, this may lead to a real loss in value, even if the nominal performance of the investment is positive. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk. This document was produced in December 2022. 15