Inflation, interest rates & recession will be the key stock market themes in 2023

Inflation, interest rates and recession are expected to remain the main themes on the stock market in 2023, which threatens to be another poor performing year, experts said. A smooth and faster-than-expected total reopening of the Chinese economy, after the elimination of the zero-Covid policy in that country, could bring a nice windfall in 2023. A sudden end to the war in Ukraine would be the nicest possible surprise in the new year.

"We have to quickly forget the year 2022," said Cees Smit, partner and general manager of the Amsterdam brokerage and asset manager firm Today's Group. "We already expected it to be a meager stock market year, but it was still disappointing. And next year it won't get much better either. It will certainly be difficult at the beginning of 2023 and the AEX index will drop to the bottom of 630 points again."

According to Smit, it remains difficult to make accurate predictions. "At the beginning of this year, one of the main themes was to stay away from the major polluters, but they performed well in 2022. Whether raw materials companies, such as oil and gas group Shell, will do well again in 2023 is uncertain, and depends on "how deep the recession will get and how fast China manages to recover,” he said.

Jos Versteeg, analyst at InsingerGilissen, also expects the first months of the new year to remain difficult. "We are not out of the woods yet. A lot depends on China."

The Chinese economy seems to be opening up more after the relaxation of its strict coronavirus policy. But according to Smit, that will probably take more time than expected. "The vaccination rate there is still very low and it will be difficult to reopen everything. If China does return to full production sooner than expected, that would be a windfall."

Nevertheless, according to Smit, a deep recession is lurking. "Despite the fact that inflation seems to be cooling down somewhat, financing costs are increasing for companies due to higher interest rates. Wage costs have also risen sharply." Versteeg and Smit agree that pressure will hit companies' profits.

According to Versteeg, inflation will remain the most important theme in 2023. The key questions regard the continuing price increases, and when the central banks will stop raising interest rates in their fight against inflation, he said. "After the complete underestimation of the risk of inflation in early 2022, central bankers now appear to be more likely to trigger a recession than let inflation spiral out of control.”

According to Versteeg, an end to the war in Ukraine would be the nicest surprise in the new year. "Especially for the human suffering among the Ukrainians and for the food supply of the poor countries. But it does not look like the struggle will end soon."