The nerves of the capital markets have been quite strained in recent months. The interest rate hikes by the central banks have put the economic areas under massive pressure, made refinancing significantly more expensive and created alternative investments in bonds to equities. This development is accompanied by ongoing geopolitical tensions manifested by the war in Ukraine and now also by armed conflicts in the Middle East. The icing on the cake is the memory of Sars-CoV-2, which is currently reaching us in the form of a flu epidemic. The effects of this are clearly noticeable in the form of an increase in volatility in equity and bond markets. The focus of attention is currently on the interpretation of the state of the economic areas in connection with expectations regarding the coming year.
And it doesn't look so bleak at all. The U.S. is already preaching that it has made a soft landing, and the EU is also showing signs of having overcome the slight recession by the end of the summer. Which still results in a technical recession, but far from a deeper one. 2024 is already seen as largely positive by economists. Even the question marks regarding the stability of the Chinese economy are getting smaller after China announced a reappraisal of the existing real estate problems.
The effect is that we have only one fact left in our markets that needs to be processed and addressed, namely that of the clear divergence in performance from large stocks to small stocks. This large to small cap bias has now become so large that one can speak of historical dimensions. The reasons for this are, on the one hand, blanket rules at large investment houses that focus solely on liquidity and at the same time address investment via ETFs or index products. On closer inspection, however, this is probably not the solution to liquidity worries, because if the worst comes to the worst, these products are also dependent on the market, but are still a dominant factor at the moment.
However, as we see an economic recovery later this year, we will see an increase in M&A and investment activity. Maybe even de-listings. Then the small caps should also be allowed to come back into focus, because their valuations have become so attractive that their performance would be clear and pronounced. And our domestic market, which is repeatedly affected by this size discussion, could once again put itself at the top of the performance of its benchmark indices.
Wolfgang Matejka, CEFA
Managing Director of Matejka & Partner Asset Management GmbH
2 November 2023
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