“The market will turn around again”

Ingrid Szeiler, chief investment officer at Raiffeisen KAG, on the current developments on the capital markets and what awaits investors in 2023

Many investors suffered painful losses this year, unless they happened to be invested in the energy, defence, or tobacco industries. How was this year from your perspective?

Ingrid Szeiler: The unique thing about this year – and last year, by the way – was that equities and bonds moved in tandem. In other words, both asset classes exhibited parallel performance. Last year they both rose and this year they both fell – dramatically. Both bonds and broad bond indices are down by as much as 15 per cent in some cases. Such drastic losses by bonds have never been seen before, at least not in the past 30 years. But equities have also fallen dramatically – by 20 per cent or more in some cases. The fact that these two asset classes are not exhibiting diversified trends is very unusual, indeed. Normally, bonds benefit when equities decline. Virtually the only currency that did well this year was the US dollar, which appreciated substantially against the euro. The US dollar’s role as a crisis currency was once again confirmed – whenever there is uncertainty on the market, capital is shifted to the dollar.

Some industries profited considerably from the war…

Yes, industries in which we very intentionally do not invest in our sustainably oriented fund products. The oil and gas shortage caused by the war of aggression in Ukraine caused the prices for these products to surge. In the commodities segment, energy themes performed very well as a result. Natural gas prices saw a multifold increase. And the prices for electricity and oil moved upwards in line with this, as well. There were also massive price increases in the agricultural sector due to interruptions of food transports from Ukraine to North Africa, but also to Europe. But speculating on food is also not an activity that sustainable investors engage in, and this is a good thing.

So did sustainable investments lose out in terms of financial returns this year?

In this unusual year, purely with regard to financial returns, yes, they did. Before this, however, they had profited for years precisely because of the fact that they were not invested in these “dirty” industries. The oil and gas industry has gained roughly 50 per cent since the beginning of the year – which is a lot when the rest of the market has lost around 20 per cent. The defence sector, which is likewise not a traditional theme for sustainable fund products, has also advanced by about 10 per cent. A third sector is the tobacco industry, which has seen a plus of 15 per cent. Thus, it’s clear that sustainable funds had no chance of performing particularly well amidst these conditions, but we are oriented towards the long term and are staying true to our approach. Credibility is important to us. We are confident that the market will turn around again.

In light of the EU’s political efforts to free itself from the dependency on Russian gas, names related to sustainable energy must be booming. Is this the case?

This sector took a beating, just like the market as a whole. There are many small and medium-sized enterprises here that are being hit particularly hard by the central banks’ rate hikes because their existing and new debt is getting more and more expensive. Added to this is the fact that providers of renewable energy – wind power, solar power, panel manufacturers, etc. – have profited significantly in recent years and thus had expensive valuations in many cases. These high prices have now settled at lower levels. But this segment fared pretty well in relation to other sectors, with a loss of 6 per cent. This is still negative, of course, but there are industries that were hit much harder. There were also other sectors that did relatively well, such as health care or infrastructure, to name two examples.

Are these sharp losses being seen as buying opportunities?

That’s a matter of perspective. From a medium-term standpoint, with a holding period of seven to ten years for equities, the prices are certainly attractive. It’s uncertain whether the recovery will already start next year, however. But if you look at the PERs, or price-earnings ratios, of the companies in the MSCI World, we are now well below the long-term average again. However, the PER is made up of two components: price and earnings. This means that when earnings decline significantly, the PER rises without the price having to do anything. You have to look at the individual names very closely, and this is hard to do at the moment because many companies are being punished even though there is no negative news to justify it.

What risks would put another significant strain on the markets?

When it comes to Europe, I’d have to say a further shortage of energy resources – for example due to further acts of sabotage. This would push things into a whole new dimension. The expansion of the war in Ukraine to other countries would also have a massive impact – this is another highly European issue. At the same time, we cannot lose sight of the food crisis. Migration from the affected countries in North Africa could increase further and subsequently lead to social unrest.

What can investors expect on the capital markets in 2023?

I think 2023 will be a friendlier year again for bonds at least, because we have a better basis than in the past due to the increases in yields and interest rates. Furthermore, I fear that the central banks are going too far in the fight against the high inflation rates, that they are overdoing it and will have to backpedal. This means that the economy will weaken, but a weakening economy is supportive for the bond markets. It could also end up being an upbeat year for equities – a lot will depend on the prevailing conditions and the course taken by the central banks. But I am at least cautiously optimistic when it comes to equities. At least in the second half of the year, we should see positive performance.

And in terms of sectors?

Infrastructure could become a major investment theme because infrastructure is being expanded in all areas: with regard to both conventional construction projects as well as technology – new networks for telecommunications, more bandwidth, and so on. The IT sector will shape the coming decades. And of course, sustainability – across all sectors. Sustainability is very important to the younger generation, and companies that make the world more sustainable – whether through climate protection, species conservation, or food and health – will profit.

How can a fund company face the massive changes of our time with adequate, forward-looking decisions?

You have to follow the momentum and know the market well. About a year and a half ago, we defined future themes, such as the energy transition, infrastructure, the circular economy, resources, and so on, and set up interdisciplinary teams that deal with the individual themes very intensively and then exchange their knowledge with one another. As a result, we have built up a great deal of know-how about the individual subject areas, but also have a clearer understanding of how they are interconnected. We utilise this knowledge in our investment decisions and derive policies and product ideas in which we wholeheartedly believe with a view towards sustainability. A few weeks ago, we received a AAA rating from Scope for our excellent quality and expertise in the management of sustainable fund strategies. We put in a tremendous amount of effort and don’t make it easy on ourselves, but as a result we are also credible when it comes to what we do.