Reasons to be "moderately optimistic" with the stock markets in the medium term

A seemingly never-ending war, runaway inflation and an economy about to enter a recession. Whatever way you slice it, it’s hard to put a positive spin on this scenario and sell it to investors. In the short term, as Ismael García Puente, investment manager and fund selector, points out, “investor sentiment remains pessimistic, despite the recent rises we have seen in most indices.” “Until we know the real effect of the rate hike and the corresponding liquidity withdrawal, it’s going to be difficult to get a clear read on buying equities or adding risk to portfolios,” he adds.

Overall, it hasn’t been a bad week for the markets. For example, the EuroStoxx 50 rose almost 1.8% on Monday, while the Ibex 35 jumped 2.4%, with a strong boost from the financial sector. As Alberto Matellán, chief economist at MAPFRE Inversión points out, the central banks’ rate hikes are a good thing for the banking system, although we’ll have to wait and see what the guidance emerging from the current slew of corporate earnings releases looks like before assessing how it might impact on the economic slowdown and, specifically, what impact it may have on non-performing loans.

With that in mind, as far as the short term goes, there’s no reason to be optimistic about a trend change. But this isn’t the case in the medium term. First off, as Matellán points out, the concept of “medium term” must be defined, which for our expert means a period of between one and three years, during which “you can be moderately optimistic.” “The stock markets are discounting a bad economic scenario, but it’s already priced in, and equity managers, some of them very well regarded, tell me that there are opportunities now because all assets across the board are taking a beating,” he adds. This hammer blow to all assets is, according to Matellán, due exclusively to the liquidity restriction that’ll continue for several more months. "As soon as we get over this hump, in the middle of next year, the stock markets could recover, because there are already some very interesting and cheap assets out there and because this extremely negative scenario has been priced in.”

The European Central Bank (ECB) meets next week, and the Fed’s Beige Book, which offers a regional analysis of the US economic situation, has been released, all at a time when inflation continues to run wild. In the case of the United Kingdom, for example, where it’s already above 10%, we’ve already begun to see how this pressure is being transferred to other components of the traditional shopping basket. But, as Matellán clarifies, this is a social drama, in that the cost of living is going up, but it doesn’t imply changes for investors or central banks as what’s unfolding had already been factored in.