By Thomas Leppert

    FRANKFURT (Dow Jones) — There was hardly any money to be made on the stock market this year. After almost three quarters, the DAX has lost around 21 percent in value, while the MDAX and SDAX have lost around a third. There is currently no sign of an end to the weakness, as the reporting season for the third quarter, which is about to start, threatens to provide new sales arguments with further profit warnings from companies. The battle central banks are fighting by fighting inflation through rising interest rates has not been successful so far. Meanwhile, the euro is trading at its lowest level against the dollar for about 20 years, which is partly due to the low yields in Euroland, but is also due to the weakness of economic output. Many economists are certain that a recession is imminent in Germany in the coming year. This could threaten further adversity for the German stock market.

    Central banks in the fight against windmills

    There were many central bank meetings in the past week, including an extremely hawkish US Federal Reserve. Both the Swiss National Bank and the Bank of England have also raised key interest rates significantly in order to lower inflation. Whether and how the partly knee-jerk reaction should work in the current environment is sometimes difficult to understand. UBS chief economist Paul Donovan criticizes the fact that Fed chief Jerome Powell did not explain how the tightening of the monetary policy should work.

    Unemployment may rise as the economy slows down, but at the moment it is not wage-related inflation. The chief economist says a rate hike is unlikely to hasten Russia’s withdrawal from Ukraine, boost California crop yields or alter notional house prices, some of which are behind current inflation.

    In the medium term, economists assume that inflation will then return, and they are predicting a recession for the coming year. For example, strategist Jim Reid from Deutsche Bank expects 2023 to be probably the worst year for the European economy since the Second World War after 2009 and 2020 due to the energy crisis in Europe. For Germany, Reid expects economic output to shrink by 3.5 percent, and for the euro area by 2.2 percent. Pretty grim figures, with Germany being one of the hardest hit by the gas shock. The banking association also expects the inflation rate to continue to rise in the short term, with consumer prices (HICP) rising by 8.3 percent in 2022 and still by 5.9 percent in the coming year.

    Elections in Italy not a game changer

    The upcoming elections in Italy on Sunday pose a manageable risk for the capital markets. According to Union Investment, a victory for the right-wing party alliance led by Giorgia Meloni is almost certain. Meloni is leader of the post-fascist party Fratelli d’Italia (Brothers of Italy, FdI). In addition, there is Matteo Salvini’s national-populist Lega and Forza Italia, the party of the former Italian prime minister Silvio Berlusconi.

    Even if the right-wing party alliance wins, the political risks immediately after the election are classified as limited. Rather, the election manifesto states that Italy is part of the European Union (EU) and the transatlantic alliance. Citigroup makes a similar statement. the financial markets are currently relaxed about the political risks in Italy. They could be right about that, according to analysts, at least for the coming months.

    To assess the situation, the stock market likes to look at the development of the interest rate difference between Italian and federal bonds as an indicator of how high the risk is assessed there. According to market strategists at DZ Bank, this spread narrowed recently after an adviser to Fratelli d’Italia, the leading party in polls, promised that the draft budget for 2023 would be based on the Draghi government’s blueprints and other reforms agreed with Brussels could be put into practice.

    Earnings momentum is likely to weaken somewhat in the second half of the year

    Corporate earnings growth was strong in the first half of 2022 after posting record growth in 2021. Record-breaking results were also achieved in the first half of this year, with Europe already reaping around 65 percent of the profits for the whole of 2021. On paper, this is an impressive achievement; however, once researchers at UBS have removed the blur caused by inflation and adjusted the focus, the picture becomes much clearer for them. On an inflation-adjusted basis, earnings for the first six months are around 50 percent of annual earnings in 2021. However, earnings in 2021 were stronger in the second half of the year than in the first. In contrast, the first half of the year was relatively stronger this year, buoyed by a handful of sectors such as energy and transportation.

    The 1-year earnings estimates are further evidence for UBS analysts that the pace of corporate earnings growth is now starting to slow compared to 2021. Defensive sectors were able to protect earnings growth relatively better than cyclical sectors, with food manufacturing, pharmaceuticals and tobacco all showing uptrends. Sales, on the other hand, continue to post phenomenal growth fueled by rising inflation rates.

    Porsche AG will find its fans on the stock exchange

    The IPO of Porsche AG will make headlines next Thursday. Even if the environment does not speak for the IPO, the demand already exceeds the offer of 25 percent of the preference shares in Stuttgart, which the parent company VW is bringing to the stock exchange. As a tribute to a legend, there are a total of 911 million shares and a dividend of 911 million euros will be paid out. Brand makers such as LVMH boss Bernard Arnault or Red Bull maker Dietrich Mateschitz are said to be among the early investors. In addition, the high proportion of electric cars should provide a buying argument for ESG-savvy investors. As early as December, Porsche AG could rise to the premier class on the German stock market, the DAX. Then index funds and trackers should also be among the buyers of the stock.

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    (END) Dow Jones Newswires

    September 23, 2022 04:27 ET (08:27 GMT)