07/11/2019 - Markets: FMM-Strategie November
The expansionary monetary policy of the central banks supports the stock markets sustainably. What is currently inspiring them, however, is the resilient hope for a temporary end to the trade conflict, for an agreement in small steps between the USA and China. This will solve blockades and make us confident for the coming months.
Looking ahead, we remain constructive in our approach to the stock markets. We see an opportunity for global economic improvement on the assumption that both the drama of the trading conflict and the Brexit discussion will subside. Basically, in our opinion, it has been sufficient that the news situation did not deteriorate any further.
We even expect a constructive solution to the trade conflict. As a result, the leading indicators, which are currently quoted at crisis level, would stabilise. In our opinion, an improvement in the leading indicators has not yet been priced in by the market. Although investors are no longer quite as pessimistic as they were a month or two ago, our observations show that many investors are still on the sidelines.
Years of capital outflows from Europe could turn into inflows when the economy recovers. At the same time, investments from the US would benefit from a stronger currency if the euro continued to appreciate and it would be worthwhile for US investors to invest outside the US - i.e. in Europe.
In the past, a rising money supply was a good indicator of a rising ifo business climate index. And we now expect that too. The tight money supply M11 has risen by 8% in Europe. Against this backdrop, we believe that sector rotation - away from defensive sectors towards cyclicals - can continue. This cannot be predicted with any certainty in the short term, but with a view to several months we are convinced of this and would take advantage of smaller setbacks to increase our exposure to cyclical stocks. With this strategy of finding and building value stocks2, we are already on the move in Germany and Europe. This plays into our cards and reduces the pressure we have been under in recent months from the strong US market and the growth and quality stocks3.
We assume that defensive quality stocks in particular will still be able to correct a good deal and will continue to be very expensive. These defensive equities with stable growth are considered as bond proxies, i.e. they react very sensitively to movements in the bond market. With the European Central Bank's (ECB) monetary easing course (QE rate4), economic optimism is likely to increase, and interest rates are likely to rise somewhat, which should put pressure on bond proxies.
We can also imagine that 10-year German government bonds could yield positively again in the foreseeable future - they currently yield -0.38%. Particularly bonds with longer maturities would suffer because their yields would then rise even faster than those of 10-year bonds. We are well prepared with our traditionally short duration. On the other hand, rising yields would help those countries and sectors that are rated as value by the market (e.g. Germany and Japan or the automotive, banking, etc. sectors).
Also, we still are convinced that the economic situation in China is better than generally perceived. We already had this impression during our last trip to the region. The situation in Hong Kong, on the other hand, is quite different, with conditions similar to a civil war in the meantime. We therefore continue to avoid Hong Kong.
Fundamental – the Basis
- The US labor market is very robust.
- The US Purchasing Managers Index (ISM) is very weak, but order intake data is good (measured by the ISM Manufacturing New Orders Index).
- The Chinese Caixin Purchasing Managers Index continues to rise because medium-sized, export-oriented companies are performing very well.
- The reporting season surprised slightly positively, especially as expectations had previously been reduced.
- Market participants expect earnings per share to average 10% in 2020. By way of comparison, the expectation for 2019 was 0%.
- The PMI downward trend (PMI = Purchase Manager Index) could turn. This can also be seen in the global PMI.
- The trade dispute could ease. However, China is in a better negotiating position than US President Donald Trump.
- China is healthier than before: Foreign exchange reserves (FX reserves for short) are stable, house prices are rising and overcapacity is no problem.
- The Sentix5 economic index is picking up significantly.
Monetary - the question of money
- The cash in circulation of non-banks (money supply M1) is increasing. The M1 is a leading indicator for the Purchasing Managers Indices (PMIs) and the Ifo Business Climate Index.
- If the Fed's first rate cuts are not followed by a recession, the next few months will be strong.
- Real interest ratesare very low, which does not suggest an economic downturn.
- The ECB's QE measures could be the low point for yields, because after QEs yields usually rise.
- The yield curve6 is becoming steeper again. This makes a recession less likely, but it is not yet ruled out.
Market technique - the mood
- The participation rate in private financial meetings for interested investors is very high, both online and offline.
- Capital outflows in Europe could turn around.
- If the bear market were to end, this would create opportunities for investors with possible realignments of portfolios.
- Before US elections, the market was usually always strong.
- Rising interest rates could help value stocks. (QE of the ECB as a start for interest rate hikes).
1 M1 = Currency in circulation at non-banks (i.e. excluding cash held by commercial banks) plus demand deposits (deposits without agreed maturity and without legal notice) of non-banks.
2 Value strategy: The value strategy is based on the idea that companies can be found on the stock exchange whose actual value is not yet recognised by market participants (undervalued companies).
3 Growth strategy: The growth strategy focuses less on the analysis of individual companies than on the analysis of entire industries. The growth investor tries to identify future growth markets at an early stage and then select the companies with the highest growth dynamics. Quality Investing is an investment strategy based on the identification of investment properties with above-average quality characteristics. The idea of quality investing comes from the world of bonds and real estate, where the quality and also the price of the investment object is determined by ratings and expert opinions.
4 QE or quantitative easing refers to an unconventional form of expansion of the monetary base (expansive monetary policy) by a central bank. Since September 2019, for example, the European Central Bank has been buying up EUR 20 billion in government bonds on a monthly and unlimited basis. It has also lowered the deposit rate from -0.4% to -0.5%, i.e. commercial banks have to pay penalty interest if they park money at the ECB. These QE measures are intended to increase the liquidity of the market.
5Sentix = Sentiment Index = Market sentiment indicator. The Sentix business cycle index is an internet-based, weekly capital market survey. It reflects investors' perception of the economy and serves as an early economic indicator that can be used to forecast the economic development of various countries and regions, measured in terms of gross domestic product.
6 A yield curve shows the yield of an asset class as a function of its remaining term. Usually, a yield curve includes government bonds with (residual) maturities of one, two, three to ten years. The long-term interest rates are normally (normal interest rate structure) higher than the corresponding short-term interest rates. This is explained by the uncertainty of expectations or by a liquidity premium. In the case of the inverse interest rate structure, the interest rates on securities are lower with increasing maturity, which is often interpreted by market participants as a signal of an impending recession.
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