“Despite everything that happened in 2022, stock markets are in reasonably good shape”

Published on: 22 February 2023

The year has been underway for a while. Good to reflect on what characterized the stock markets and the economy last year and what developments we can expect this year. How will tech companies fare? And to what extent will the war in Ukraine still play a role in the financial markets? Charles Kalshoven, macroeconomist and investment strategist at APG, updates us.

Early last year, the expectation was that we would first have to deal with the Covid shocks, after which everything would return to normal, Kalshoven says. "Then we had the Russian invasion of Ukraine, energy prices shot up and inflation reached levels we had not expected. Central banks also raised interest rates faster than many had anticipated and they switched from a generous to a tight monetary policy." All this had an effect on financial markets. Last year, for example, the volatility index VIX was at 25, while in the years before Covid it stayed around 15.

Is there a lesson to be learned from last year’s developments?
“In short, the lesson is that tomorrow will not necessarily be the same as today. We must keep in mind that major changes can always occur. For example, the war in Ukraine changed our thinking about peace and security in Europe. We thought we had a reliable energy supplier in Russia, but that turned out not to be the case. Before, we thought we could manage energy supply just fine through the market, but last year it turned out that energy is politics - or worse - war. At various points in history, our worldview has tilted, such as the fall of the Wall and Sept. 11, 2001. The war in Ukraine is really another one of those times.”

What are the consequences of the emerging geopolitical tensions for businesses?

“In part they are logistical in nature, due to sharply increased energy prices and the fact that many products are, or were, not readily available. In part, the consequences are also financial, due to higher interest rates. Incidentally, corporate balance sheets look a lot better than they did before the 2008 financial crisis. Although the MSCI World Index did fall 20 percent last year, stock markets are back nearly to where they were at the end of 2019. Despite everything that happened last year. This is also due to the fiscal and monetary force used: governments have boosted the economy substantially.”

To what extent does the uncertainty around the situation in Ukraine still play a role on the trading floor?

“Through energy, among other things, although the impact of the war on energy prices now seems less than it was. For example, thanks in part to the mild winter, European natural gas stocks are still pretty well stocked, although we don’t know if next winter will be mild too, of course. If the situation in Ukraine escalates further, it will obviously not be good for stocks. Then you will see another flight to safety. Investors often seek refuge in U.S. government bonds, the dollar becomes more valuable and European stock prices take a hit. In addition, war is obviously not good for economic sentiment.”

When inflation occurs, equities are often a good medium- to long-term investment. Will that hold true for this year as well, even though inflation is slowly decreasing?
“We expected a just-below 2 percent inflation for a long time. We now expect to be slightly above 2 percent in the long term. With higher inflation comes somewhat higher equity returns in the longer term because, after all, equities are real assets. As pension investors, we mainly look at the long term. But if we have to say something about this year, it depends mainly on how fast inflation falls. Or rather: how much economic damage it will take to get inflation back in its cage. You do hear the term ‘soft landing’. In that case, only a limited slowdown in growth is needed for inflation to cool down. With a ‘hard landing’ it takes a solid recession - regardless of whether it is caused by additional interest rate hikes. In a recession, the economy shrinks, but corporate profits fall even harder, which is bad news for stocks.”

The interesting question is whether ChatGPT is shifting the balance of power in the tech sector

One industry that is not doing so well is the tech sector. During the Covid crisis, the value of tech companies skyrocketed, but now they are laying off employees by the dozen. Do you expect them to recover anytime soon?
“During the Covid crisis, people were able to work from home en masse thanks to apps like Zoom and Teams; tech companies benefited tremendously from that. What also played a role was that interest rates were low. For this sector, a lot of their expected profits are in the future and the expected revenue stream is very interest rate sensitive. Now interest rates have risen and Covid has passed, giving tech companies a hit. The interesting question is whether ChatGPT is killing Google’s business model. Is it shifting the balance of power in this sector? And will the industry as a whole remain profitable and able to generate growth? This is related to whether artificial intelligence will take off and what that will do to revenue models.”


What might such a revenue model look like?
“The question is whether there will be a unique product or a commodity. If Google, Facebook and Microsoft all have their own similar artificial intelligence program such as ChatGPT, then competition among them will prevent monopoly profits. But it is also possible that one program is clearly the best, and the company behind it can charge good money for it. If that is the case and people go to ChatGPT or a similar program instead of Google, that may mean the end of Google's advertising model. For Google's or others’ ‘free’ services, you now pay with your attention via the trail of personal data you leave behind. Companies want to know everything about you because that way they can show personalized ads. With a successful paid chatbot - ad-free - that revenue model may disappear. Then the whole advertising market will look different.”

To go back to the current geopolitical situation, you could say that we are entering an era of protectionism. Is that purely bad news, or does it also offer opportunities?
“First of all, protectionism is inefficient because production does not take place where it is relatively cheapest. Basically, everyone is worse off. There is possibly a positive consequence, however. During the Cold War, the West and the Soviet Union were engaged in an arms race, which led to huge spending on defense and space exploration. That spending in turn led to several inventions, such as the Internet and Teflon. Public spending on research and development can thus benefit from distrust between geopolitical blocs, which protectionism is a manifestation of. Currently, the United States gives huge subsidies to companies developing green technologies. If that accelerates further sustainability and the energy transition, that too is a positive aspect of protectionism. In a sense, the same is true of the EU’s Carbon Border Adjustment Mechanism (CBAM). That mechanism is protectionist to the letter because exporters from non-EU countries have to pay a border tax to sell their products in the EU. But that only applies if carbon emissions are not already taxed in their own country. It should prevent ‘dirty’ production from ‘leaking’ to countries with more lenient rules. That will not make the world a greener place. You could say that CBAM corrects market failures and is not really protectionism. CBAM has yet to prove itself, but it will hopefully promote the use of carbon taxes in other countries.”