Reduce equity risks - exploit selective opportunities

Inflation, rising interest rates, hawkish central banks and ongoing energy crisis in Europe sent the stock markets into the basement in September. In October we expect a short-term recovery on the markets.

The authors

DJE's team of analysts monitors and evaluates the markets on an ongoing basis using the in-house FMM method according to fundamental, monetary and market criteria. They summarise their findings once a month.

From the analyst team of DJE Kapital AG

The major central banks in the USA and Europe are currently fighting inflation by raising interest rates, some of them drastically. Accordingly, investors' interest rate expectations rose massively in September. From our point of view, a certain exaggeration is discernible. We do not expect interest rates to continue to rise sharply from now on. This is because the oil price is unlikely to play such a large role in US inflation from October onwards. The energy component could even push inflation down in the coming year. The same applies to logistics costs (freight rates).

From a geopolitical perspective, we do not think it is impossible that there could be negotiations in the Russia-Ukraine conflict after all. Putin seems to be under pressure domestically, so there might be some hope for diplomatic solutions now. Easing geopolitical pressure would be very positive for markets, but could weigh more on oil and the US dollar.

In October, we think a temporary recovery in the equity market is possible, mainly due to the very negative market technicals. In the longer term, however, the environment for an economic recovery remains difficult: the energy crisis in Europe is far from being solved and corporate investment appetite is curbed. On the equity side, we therefore remain cautious and aim to reduce risk somewhat through targeted shifts from defensive to growth stocks. On the bond side, we continue to see opportunities, such as investment grade bonds (AA or A) with up to 5% interest.

 

Equities/Bonds

  • On the equity side, we remain cautious
  • Focus on companies with high pricing power
  • German government bonds remain unattractive
  • Selected corporate bonds offer good opportunities

Due to the very negative technical market factors, we believe a temporary recovery on the stock market in October is possible. In the longer term, however, the environment remains difficult in our view: The energy crisis in Europe has not been solved, and we do not consider a stronger investment propensity of companies to stimulate the economy to be realistic, as companies should rather focus on debt repayment. Overall, we remain cautious on equities.

We strive to reduce the equity risk somewhat through targeted shifts from defensive stocks, such as energy or agricultural stocks, to growth stocks, such as technology stocks. On the equity side, we continue to believe that a focus on high-quality companies with strong pricing power makes sense, as these can generate solid profits even in a low-growth environment and thus probably offer the best investment alternative in the long term.

For bonds, investor sentiment remains in the basement. Volatility in the bond market has recently been even higher than in the equity market. Contrary to the majority market opinion, we do not believe that interest rates will rise any further from now on after the sharp increase in interest rate expectations. In fixed-income securities, we still consider German government bonds to be unattractive. In contrast, selected high-quality corporate bonds continue to offer opportunities in our view. Especially attractive are issues that currently yield up to 5% or more.

 

Economy / Regions

    • USA attractive
    • Money supply development in Asia generally better
    • China remains difficult for the time being
    • Germany and Europe favourably valued, but at risk

We continue to consider the US market more attractive than Germany and Europe, because we believe it offers the better risk-reward ratio. China remains difficult to assess. However, the interest rate differential with the US has shifted and therefore China should benefit from lower interest rates with a certain time lag.

In addition, China should continue to stimulate on the real estate side. If China opens up the economy more in 2023, ending the zero-covid strategy, the Middle Kingdom's economy and stock market could surprise. Monetary developments in Asia generally continue to be better. Besides China, Japan also continues to have positive excess liquidity.

In our view, the German market is favourably valued, but the further rise in energy prices poses major economic and location risks. We therefore remain cautious on the German and European equity markets.

We consider the energy sector attractive, but with reservations. On the one hand, energy supply cannot be increased from one moment to the next, so energy prices are likely to remain high for some time. On the other hand, a stronger short-term correction could be expected if there is a negotiated solution to the Russia-Ukraine conflict. In the technology sector, the worst may be behind us if US interest rates stop rising.

 

Currencies / Basic Resources / Gold

    • Euro continues to weigh
    • Gold could recover

The euro is likely to remain under pressure due to developments in Europe, especially in Germany, and the energy price problem. Should Ukraine and Russia sit down at the negotiating table, however, the easing geopolitical pressure would support the euro. Investor sentiment and technical market data point to a certain recovery in gold.

Note: Marketing advertisement - All information published here is for your information only and does not constitute investment advice or any other recommendation. The statements contained in this document reflect the current assessment of DJE Kapital AG. These may change at any time without prior notice. All statements made have been made with due care in accordance with the state of knowledge at the time of preparation. However, no guarantee and no liability can be assumed for the correctness and completeness.