In today's interview with analyst Tomáš Cverna, we focus on a summary of the first quarter of 2023, the outlook for the future, as well as another sector that could be at risk after the banking crisis.

Can you introduce yourself?

My name is Tomas Cverna, I am 20 years old, I am a university student and I am also an equity analyst at XTB brokerage. I focus on Czech stocks, which I comment on in my video series called A Week on the Prague Stock Exchange. In addition, once a month I publish a more detailed look at a selected stock title in Stock Focus, which, like the analysis of domestic stocks, can be found on XTB's YouTube channel.

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As we have the first quarter of 2023 behind us, I would like to ask you to evaluate the first 3 months of the year.

The first weeks of the new year were marked by an influx of "fresh" capital. However, it is similar at the beginning of each quarter. Besides, the closely watched macroeconomic data in the US came out relatively strong. Thus, the US Fed had no reason not to continue with its restrictive monetary policy. This caused a correction in the stock indices. Then came a rather turbulent period associated with complications in the banking sector, which hung in the air due to the Fed's aggressive rate hikes, but no one imagined that it might actually come. Despite this, market sentiment began to calm in the last weeks of March, resulting in a strengthening of equity indices. The S&P 500 stock index has gained more than 7% since the beginning of the year despite the high volatility.

Our investor community is primarily focused on US equities, so I would like to stay in the US and ask you if the high inflation situation is improving and if that is sufficient at the moment?

Not only CPI inflation but also PCE inflation is showing a decline, which is positive for the markets. However, I don't think that this will prompt the Fed to make any quick turnaround because we need to prevent inflation from stalling above the inflation target. One of the possible catalysts for the forced turnaround in monetary policy was the banking crisis. However, this was "solved" by a programme to provide liquidity to banks. I am very surprised by the strong US labour market, which we will hear more about on Good Friday. In general, however, inflationary pressures are slowing in the US economy, as evidenced by the decline in the month-on-month rate of wage growth.

At this point, when might the Fed stop raising interest rates?

There has been a lot of discussion of this topic recently in connection with the banking crisis. The market thinks that the May meeting will be the last one where there will be an increase of no more than 25 basis points. While high interest rates are detrimental to economic growth, for the reason I described above, I am more in favour of keeping them at elevated levels for longer. A change in the Fed's stance on monetary policy in the wake of the banking crisis is not to be expected because the central bank has used other tools to maintain the stability of the banking system.

Do you perceive any additional risks in the markets at the moment following the banking crisis? I have read that commercial real estate may be next after the banking crisis. What do you think about that? Is that realistic?

Risk is ubiquitous in the financial markets. I certainly wouldn't underestimate commercial real estate in particular, which is directly related to the large layoffs in corporations. This is occurring after companies hired employees in large numbers to accelerate their businesses at a time when liquidity was almost free. Alphabet $GOOGL-0.2%, the parent company of Google, is one such example. The layoffs and under-utilization of offices not only put pressure on the landlords of these properties, which are often the so-called REITs, but also on the banks that finance these companies with mortgage loans.

Could you give us some outlook towards the next few months and 2023 in general? What do you expect next for the stock markets?

Personally, I expect a recession to come, but we won't know that from the data until later. However, the next few months will also be marked by falling inflation. Right now, I don't see any catalyst that will play to increase it. As for energy in Europe, which accounted for a large part of the increase in the consumer basket last year, thanks to the weather and supplies to LNG bunkers, the summer might not be as turbulent as last year. The big unknown is food prices, which continue to rise.

Do you find any sector or specific stocks at attractive levels at the moment?

I find not only US tech giants interesting, but also IT consulting firms, for example, because of the interest of companies in digitalisation. In the long term, the healthcare sector could also be nice. I would avoid the energy sector, which was at record levels last year. However, a deeper recession could cause lower demand for oil and the associated sell-off in oil producer stocks. The threat of a recession also makes me distrustful of companies that are directly tied to consumer demand.

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Please note that this is not a financial advisory.