European shares face rocky start to 2023

Tightening financial conditions and the prospect of an economic recession are going to be a toxic brew for European shares going into 2023 with a key regional benchmark seen sliding towards October lows, a Reuters poll finds.

The poll of fund managers and strategists surveyed over the past two weeks forecasts the STOXX 600 equity benchmark to reach 408 points by mid of next year, a near 8% drop from Friday’s close.

Even as Europe has joined a recent global stock market recovery, fuelled by hopes of a pause in US interest rate hikes, the STOXX 600 remains on course for its biggest one-year drop since 2018, down around 10% year-todate.

“The impact of aggressive rate hikes will be felt on the real economy and hence earnings growths in the next few quarters. Based on our economists, we expect a shallow recession in Europe which leads to forecast an earnings decline of 12%” next year, said Barclays strategist Emmanuel Cau in London.

The index could recover in the second half, aided by expectations of peaking rates and reach 434 points by end-2023, down 1.5% from Friday’s close and over 12% away from the lifetime high hit in January, according to the poll.

“The rise in risk premiums across asset classes will eventually reach a tipping point where a shift to more return-oriented investments will be warranted,” said Tomas Hildebrandt, senior portfolio manager at Evli in Helsinki.

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

For the coming months, though, investors fear eurozone equities could lag other markets. The region’s economy is seen as particularly vulnerable due to an energy crisis exacerbated by the Ukraine war and as the European Central Bank is steadily raising interest rates to fight price pressures in the bloc.

“The economic outlook looks challenging as our economists forecast a recession in the eurozone,” said Marc Haefliger, Head of Global Equity Strategy at Credit Suisse in Zurich. — Reuters