Today – with some distance – we can look back slightly incredulously at 2020 and 2021, the years dominated by the pandemic: all of a sudden, our everyday lives were turned upside down. The impact of that dramatic period is still being felt – not least economically. Inflation rates in most countries still lie well above central bank targets, even though they’re far lower than at their peak. Industry also faces a challenging situation worldwide.
This trend emerged during the pandemic when there was a huge spike in demand for goods. The restrictions imposed on movement and consumption as well as generous state support measures in many countries were major contributory factors. At its peak, demand for goods in the USA was around 10 percent above the expected level.
In this context, we indicated back in 2022 that the sharp rise in demand for goods could trigger a wave of inflation and that the subsequent slump in demand could lead to a recession. The risk appeared particularly high in the European economy, which is largely powered by Germany – the world’s second biggest exporter of goods. In response to higher risk, we significantly reduced our European equity allocation twice over the course of 2022.
Now, almost two years on, we’ve seen an enormous rise in the level of prices. The European economy has stopped growing and Germany has actually entered recession. China, the world’s biggest goods exporter, is also facing difficulties. So it’s hardly surprising that industrial companies in many countries have been extremely pessimistic,b at least until recently. Sentiment among industrial companies improved considerably in January for the first time in years on a transregional basis. While companies remain cautious, the mood both in Europe and other industrial nations, too, is much more upbeat. Global demand for goods and the goods price trend have also stabilized recently. This has reduced the risk of another significant deterioration or a sustained slump in the European economy.
In combination with the sharp drop in inflation in the autumn, Europe’s economic prospects have improved. We’ve responded to this positive development by reducing our underweight position in European equities. This decision also takes into account that upturns on the financial markets often begin before phases of economic weakness come to an end, but after the worst point is over. At the same time, we’re aware the economic climate remains challenging and are maintaining slightly defensive positioning overall.