With a fresh start in 2023, we decided to present you with various expectations for 2023 with the hope that this year will be better than the last one. As we are all aware, on a wider scale the regional capital market is following a global equity sentiment. Therefore, in this blog, we will present you with global equity sentiment from the biggest asset managers and investment banks along with our view of a few specific topics like interest rates and inflation.
2023 is expected to be a challenging year for the world economy. The biggest asset managers, leading investment banks and a few other financial institutions are all predicting a high likelihood of a global downturn with slight deviations in expected impact on financial markets and the real economy. There are also mild recession expectations in the Euro area and milder ones in the US, but risks are skewed to the downside. Specifically, Wall Street strategists are mostly forecasting negative outcomes, with the consensus view being that a mild recession will hit both sides of the Atlantic. However, leading investment banks and assets managers see the economy defying the bearish consensus as price growth eases, signaling big gains for investors if they get the market right. Remembering the pandemic, it is no longer a major consideration for global macro strategists, and the outcome of China’s high-risk effort to rapidly reopen its economy could have profound consequences for the world’s investment and consumption cycle. Also, a Bloomberg News survey carried out at the end of 2022 showed that three-quarters of Economists expect a US recession in the next 24 months. There is no bright future expected for crypto markets, at least in this year, while big investors are not expected to continue supporting the sector in a big way as they were doing it in the previous period. While there is a general consensus that 2023 will be a challenging year, still there is some optimism that the economy may defy the bearish predictions and deliver positive surprises.
Further, a desynchronized economic slowdown and elevated inflation are expected. The consensus view is that central banks will likely be forced to pivot and signal cutting interest rates sometime next year, which should result in a sustained recovery of asset prices and subsequently the economy by the end of 2023. But for that pivot to happen, a combination of more economic weakness, an increase in unemployment, market volatility, the decline in levels of risky assets and a fall in inflation is expected. We expect inflation to stay elevated by the second half of the year, which will result in the central bank’s hiking cycles becoming more mature. Both Fed and ECB are raising their reference rates to prevent price levels from growing further, while it is expected that Fed & ECB will peak their rates at 4.9% and 3.4%, respectively.
Last Friday, we wrote about the latest CPI in the US from the last week and you can read more about it here. In short, we witnessed another decline in US headline CPI to 6.5% (vs. 7.1% in the month before), while MoM the 0.1% decline was reported. Further, below you can see Croatian CPI development. Croatian CPI for the whole 2022 comes out tomorrow and it will be interesting to see if inflation growth starts to flatten on a monthly level. Further, for January 2023 it is expected for CPI numbers to be further elevated by „euro-inflation“ regarding Croatia’s entrance into EMU. It is a common case for countries that adopted Euro as their currency. Higher prices were reported, which was correlated with conversion dates. The total conversion effect on inflation was previously expected to amount to somewhere around 0.5 p.p., further boosting current CPI numbers, as previously reported in the countries that adopted the euro. However, this impact could be understated taking into the account current price increases we are witnessing in Croatia. All things considered, it will be especially interesting to see inflation development in the upcoming months.
Overall, there is a general consensus that 2023 will be a challenging year. But to end on a positive note, there is also some optimism that the economy may defy the bearish predictions and deliver positive surprises. And to draw attention back to the region, we would like to emphasize that the specificity of the region is that it holds some true gems! After all, the market will decide and only time will show the results.
Today, we are bringing you an overview of the risk of investment of SBITOP constituents, with data for the last 3 years.
Recently, we published our overview of the risk of investing in Croatia, with an analysis of the CROBEX index and its constituents. You can access that analysis here. Today, we decided to bring you a similar overview of another local market, i.e. Slovenia. As compared to the CROBEX index, the SBITOP index is not only smaller (10 companies vs. 24, with the usual number being 9 companies and the newest addition, Equinox, making up the 10) but its companies are also more liquid. Overall, in fact, the number of listed companies in the Slovenian market is a lot smaller. We would like to note that Equinox is excluded from the overview, as it was only added to the index last week.
With that out of the way, how did we calculate the risk? As in our Croatia overview, we used the standard deviation of daily price changes of the SBITOP constituents. The standard deviation could be considered a measure of risk, as it implies a dispersion of the price from some mean. This dispersion would imply volatility, and volatility is one of the measures of risk, one of the main ones in fact.
One thing that needs to be noted here, is unlike the CROBEX comparison, where most of the companies in the index did not have an active market maker, almost all the SBITOP constituents have a market maker. Why does this matter? In measuring standard deviation as a measure of risk, price changes are influenced by several factors. First of all, of course, the difference between the bid and ask prices, the so-called bid/ask spread. Also, they are under the influence of liquidity, both in the terms of the available shares at any given price point, but also the amount of money required to move the price share, and of course, the ability to enter or vacate a position. All of these things are helped by a market maker, as they reduce the bid/ask spread, increase the available number of shares, and thus “reduce” higher capital requirements. These refer to the fact that if you believe in some companies, and are willing to invest in them, a company with a lower bid/ask spread means that you will influence the price less if you buy a more significant number of shares, but also that you will decrease the price less if you decide to vacate your position. This of course is, as compared to stocks with higher bid/ask spreads.
So having all of this in mind, how risky are the Slovenian companies to invest in?
Standard deviation (risk) of SBITOP constituents (2020 – 2023 YTD, %)
Source: Bloomberg, InterCapital Research
The companies with the highest standard deviation, are Unior, at 2.52%, followed by Luka Koper, at 1.86%, and Cinkarna Celje, at 1.79%. Unior and Luka Koper are the only companies here that operate without a market maker. Even so, Unior’s average bid/ask spread in the last 3 years amounted to only 1.06%, while the average daily turnover amounted to EUR 12.4k. Luka Koper operates with a bid/ask spread of 1.95% and an average daily turnover of EUR 46.8k. Cinkarna Celje, which does have a market maker, has an average bid/ask spread of 1.48%, and an average daily turnover of 75.8k.
On the flip side, the lowest standard deviation is recorded by Triglav and Petrol, both at 1.43%. Triglav recorded an average bid/ask spread of 1.39%, and an average daily turnover of EUR 107.4k. Petrol also has a similar bid/ask spread of 1.42% in the observed period, with a turnover of EUR 146.3k.
Compared to Croatia, these numbers show us that despite periods of both growth and decline (2021 for growth, 2022 for decline), the average bid/ask spread, as well as the volatility of the price changes on the Slovenian market are quite low. Combined with a turnover that, whilst not high by global standards, is quite high for the region, larger amounts of shares can be bought/sold without affecting the price. Also taking into account that Slovenian companies have solid dividend yields, that are app. 2-2.5x higher than in Croatia, holding these shares for longer will yield solid returns even if the share price themselves remain stagnant, or decline. It’s only a loss once the decision to sell the share is made, until then, there is also potential for further returns. And as many global investors and analysts know, investing, in the long run, has proven historically to always yield returns, and periods of downturn usually don’t last very long, especially as compared to periods of bull runs.