Konstantinos Xenos: 2022 will be remembered as a brutal year for stocks

Konstantinos Xenos, Chairman and CEO of Piraeus Securities, looks at the US, European and Greek markets, noting what a brutal year 2022 was and sharing his views on what lies ahead.

2022 has been described as one of the worst years on record for equities. Why was this?

2022 will be remembered as a brutal year for stocks, with the S&P marking a 21% loss in the first half of the year. After years of abundant liquidity and cheap money, the Federal Reserve was forced to start raising interest rates aggressively in March ’22 to combat soaring inflation. Despite of the initial expectations that inflation would be temporary, prices continued to move higher, spooking investors across the year. Global equities also felt the aftershocks of Russia’s invasion of Ukraine, putting further upward pressure on fuel, food and commodity prices. The Fed’s hawkish policy sparked fears of recession and lower corporate earnings. In Q4 2022, inflation started to ease while strong earnings reports provided confidence to investors that companies could weather higher rates and a mild recession. The S&P 500 finished the year 19% lower. In this adverse environment, Greece’s equity market, not only showed resilience but finished the year with a 4% gain. Despite the headwinds, the economy grew by around 5.5%, with tourist arrivals reaching the all-time high of pre-pandemic levels.

How would you describe the investment outlook for equities in 2023?

Equities are not out of the woods yet but it’s likely that they will be in a much better place by the end of 2023. A great number of challenges lie ahead, such as the easing of interest rates, dollar, depth and length of recession, while the end of the Ukraine war and China’s battle against COVID-19 remain unknown. The prevailing view, as currently reflected in the bond market, is that inflation will continue to ease in Q1 of ’23 and monetary tightening will end by the end of H1. If that’s the case, central banks will likely pivot and signal rate cuts in the second half of ’23, which should result in a sustained recovery of asset prices and, subsequently, the economy. Contrary to the global outlook, Greek equities are facing a more benign backdrop, supported by 1-2% expected GDP growth in 2023 and the prospect of Greece re-gaining investment grade this year.

What kind of returns can be expected in 2023?

Investors should expect an uneven year in terms of returns. Market performance is likely to remain constrained in the first half, due to central banks’ restrictive policies. An eventual Fed pivot could push stock prices up towards the second half or by the end of the year, allowing global main indices to record a 10-15% gain for the year. In the global landscape, we could see bright spots such as Greece, whose Main Index has got off to a strong start after gaining 10% in January 2023.

What kind of shares are of most interest to investors?

The European economy is, admittedly, facing more challenges than the US. Higher rates and being at the epicentre of an energy and geopolitical crisis cast doubt over European growth prospects. However, European equities offer more attractive valuation as opposed to US equities, which offer exposure to a faster growing economy, albeit at higher valuation. In the EM space, the risk-reward profile is also improving with the bulk of USD appreciation likely behind us. In terms of sectors, investors’ post-pandemic preference for cyclicals over defensives seems to have reversed as of late. Energy, banks and insurance continue to attract interest as opposed to the least preferred industrials, real estate, telecoms, etc.

Are investors in equities more interested in capital appreciation or in dividends?

That greatly depends on the investor’s profile. However, in bull markets, investors generally seek stocks offering higher prospects of capital appreciation. On the contrary, in a downward market, dividend stream can provide a nice ballast to a portfolio’s return. A conservative investor is highly likely to invest in a dividend stock and vice-versa. In 2022, when global markets were falling, dividends provided a safety net to investors. And while this trend hasn’t really changed, it is likely that, when market sentiment and economic conditions improve, we will see investors being more focused on capital appreciation.

Which shares are best for dividends?

Sectors with strong and stable cash-flow streams such as telecoms, utilities, insurance, and energy traditionally offer decent dividend yields. Prior to the financial crisis, banks were attractive from a dividend perspective. In the Greek equity market, OPAP, Motor Oil, Mytilneos and Hellenic Telecom have historically offered decent dividend growth and yield to investors.

(This interview first appeared in the February 2023 issue of GOLD magazine. Click here to view it.)