05/07/2019 - Markets: FMM Strategie
Our view to the future remains confident but the trees are unlikely to grow into the sky in summer. First of all the usual seasonality is against it and secondly the prices have already risen considerably this year. We expect the market to consolidate over the summer.
DJE's team of analysts monitors and evaluates the markets on an ongoing basis using the company's own FMM method according to fundamental, monetary and market-related criteria. They summarise their results once a month.
From the Analyst Team of DJE Kapital AG
After a bad May we saw a very good June. But it was worth listening to our technical market indicators and not leaving the market any further - even though the fundamental picture at the beginning of the month still looked really bleak. We remain confident about the future but trees are unlikely to grow into the sky in the summer. First of all the usual seasonality speaks against this and secondly prices have already risen considerably this year - with earnings estimates declining and numerous profit warnings at the same time. Despite the many bad news from politics and the economy, we do not see a bearish trend in sight. Share buybacks and an expansive fiscal policy are currently counteracting such a development.
We assume that the market will consolidate over the summer. We can imagine a better stock market as of September if the economy remains stable. This was also our thesis at the beginning of the year: a weak economy in the first half of the year and a better second half thanks to base effects. This is also the crux of the matter: the likelihood of interest rate cuts has increased due to the recent poor economic data. Market participants are therefore now firmly expecting several rate cuts. The prices of equities which are similar to bonds due to their high dividend payments reflect this expectation.
In the past key interest rate cuts were usually accompanied by a weak stock market (as recessions had often already begun, therefore comparable to the current situation to a limited extent). If the already celebrated interest rate cuts by the stock market fail to occur since the economy stabilizes, this would in turn lead to disappointment. However, we consider this to be unlikely in the short term because the central bank is aware of its influence on the stock market. In the current situation they are unlikely to postpone a cut that has certainly been priced in. The latest, weak inflation data in particular give the US Federal Reserve (Fed) room for manoeuvre. In addition it was a lesson for the central banks from the financial crisis to provide proactive support. We therefore expect interest rate cuts and further doping of the markets and are always watching closely how the market reacts.
We have not yet abandoned the issue of value either. If the economy improves surprisingly and interest rates rise these shares would have the potential to catch up. At the moment it is still too early but there could be an opportunity in the course of the year.
On our own behalf
Our two largest funds DJE - Zins & Dividende and DJE - Dividende & Substanz reached new highs and performed very well compared to their peer groups. Dividend funds tend to have a permanent headwind when value stocks perform poorly, as they do at present. Therefore the performance of the two funds should be valued even higher.
- The global economy has not improved and China is also weakening.
- US President Trump could invest in infrastructure to keep the economy going. The timing is difficult because he won't shoot his powder too early before the election.
- The indicators we are observing show stabilisation at best.
- So far this year China has surprised positively. The economy is holding up better than expected at the beginning of 2019. Recently the real estate market was not quite as strong but overall it was good. On the other hand there is hope that the car market will pick up from July with better lending.
- The purchasing managers' index in China is only just under 50. Although this is in the contracting range it is relatively good compared to other countries such as Germany and given the political circumstances.
- The level of survey indicators, e.g. for business climate or investor confidence, is in many cases already crisis-like. CEOs in the USA are also very cautious.
- Interestingly, the OECD leading indicators for China are turning slightly upwards. These are generally ahead of other countries and were also helpful at the beginning of 2016.
- Should there be an economic upturn, the purchasing managers' indices and CEO surveys have some upward potential.
- Unfortunately, labour market data are showing initial scratches, both in Germany (especially southern Germany) and in the USA.
- A Brexit is no longer a surprise and companies had time to adjust to it. But for Germany it would be a burden because GB is one of the largest trading partners.
- In the near future there will have to be more tax incentives to keep the economy going. Then the pressure on Germany to act will also increase.
- The trade conflict cannot be predicted. With a little luck it might be quiet for a few weeks but the issue will certainly come back again. As long as Trump is US President the whole thing will take place on the open stage. What Trump is doing with world trade and globalisation is dangerous from our point of view. Basically he gives countries the choice of working either with the US or with China.
- The statement of the currently inverse yield curve should not be exaggerated as long-term interest rates are heavily manipulated. Normally central banks only influence the short end. That's different this time and that's why the significance is limited. In the US the long end is also being depressed by purchases by Europeans and Japanese who have no chance of returns at all on their domestic markets.
- Lending is only rising moderately, but it is rising.
- Central banks are loosening their monetary policy, interest rate cuts are likely, both in the US and in Europe but this usually has a delayed effect only.
- Falling US interest rates should boost demand for loans and building permits again. Building permits had already undergone a long correction in 2007/08 before the stock market collapsed. There is no sign of this today.
- China wants to further loosen the minimum reserve rates for banks and lower interest rates which will increase liquidity in the market.
- Draghi will provide monetary tailwind, in other words: the doping of the markets will continue.
- Inflation is not an issue at all as producer prices in the USA and China show.
In terms of market technology
- The seasonal rhythm usually promises the markets some headwind in the summer.
- Investors are cautious, as fund manager surveys and other sentiment indicators show.
- Demand and the strong rise in high-quality equities also show investors' caution. However, there have been signs of a slight easing in the last few days.
- Medium-sized companies are currently performing worse than large ones, which also reflects investors' caution.
- Active equity funds, but also ETFs, are recording outflows.
- Money market funds and bond funds are recording inflows.
- The atmosphere for gold is positive and we remain confident about gold because it is the first significant impulse we have seen in years.
Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care, the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de. The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent.