Markets Update November 2023 - Stock markets celebrate the end of the global rate hike cycle

Easing inflationary pressure and weak US macro data have led to strong price gains on Wall Street. As there is currently little to suggest a second major wave of inflation, the markets are no longer expecting further interest rate hikes from the major central banks. The toughest monetary tightening cycle of the last 40 years is therefore potentially coming to an end. Looking ahead to 2024, it now even appears that key interest rate cuts cannot be ruled out again. In an environment of recessionary risks and high budget deficits, quantitative tightening is also unlikely to be maintained in 2024. This general expectation for the future has led to a noticeable fall in long-term interest rates on the markets, which in turn has boosted value-sensitive equities. Positive signals for risk investments have also recently come from the geopolitical sphere. There has been a rapprochement between US President Joe Biden and China's head of state Xi Jinping, while the feared escalation in the Middle East has failed to materialize. As the last quarter of the year is also characterized by positive seasonality, the end of the year is likely to be positive in the absence of geopolitical disruptions.

Attractive valuation levels for small caps

Small-cap companies have had a disastrous year on the stock market and have fallen far behind the broad market. Both the relative performance and the valuation gap of small caps are at multi-decade lows. On the one hand, the tightening of interest rates has had a significant impact on this segment. Small caps generally have a poorer balance sheet quality than highly capitalized companies and have to pay substantial premiums when interest rates rise. Secondly, small caps are usually much more sensitive to the economy than large caps. As a result, the global economic downturn has had a disproportionately negative impact on this segment. However, these negative factors are likely to subside over the course of the coming year and result in a significant catch-up movement for small caps. The interest rate environment is likely to be less restrictive than in 2023. Although no support is expected from the economic side in the first half of 2024, this should already be largely priced into the prices of small caps. Due to the attractive valuation levels, the small cap segment could be a sensible addition to the portfolios of professional investors with a view to 2024.