The Cards Are Being Reshuffled

Rising inflation rates, rising interest rates and ongoing geopolitical tensions are forcing investors to rethink. A paradigm shift is taking place in the valuation of shares: Factors such as profitability and market position are becoming more important than sales growth.

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

Since mid-March, the major stock markets have recovered strongly, despite ongoing geopolitical pressures and the associated high level of uncertainty, as well as continued monetary headwinds in the USA. The global MSCI share index achieved an overall gain of just under 3.5% in March in euro terms. With our dividend strategy, we were even able to outperform the benchmark last month. Historically, April is a good month for both equities and bonds. However, short-term forecasts remain difficult. Nevertheless, we are looking constructively at the coming weeks and remain positive for equities, especially in the medium and longer term. With the current very low real interest rates and the persistently high inflation rates, real assets such as equities remain the best investment alternative. Our focus is on companies with high pricing power and thus stable or ideally rising margins.

Equities/Bonds

  • High equity ratios, low bond ratios
  • Focus on defensive equities

In the current year, mixed funds with high equity ratios have mostly performed better than those with high bond ratios. In our view, it is still appropriate to focus more on equities. One of the core arguments for investing in equities remains the very low level of real interest rates. We believe a focus on defensive equities makes sense. The environment for bonds remains difficult in the medium term due to the strong rise in inflation and the expected interest rate hikes, especially in the USA. We are particularly cautious about corporate bonds with longer maturities.

 

Regions

  • USA better than Europe in terms of economy and stock markets
  • Ukraine war burdens Europe, especially Germany
  • China remains difficult to assess and risky

The US should continue to outperform Europe in terms of economic and stock market performance. The war affects the USA far less than Europe, and many US companies even profit from it. There is unlikely to be a recession in the USA in 2022, but with a view to 2023 there is also a certain risk of recession there - especially in the event of an excessively restrictive central bank policy. Germany and Europe, on the other hand, will probably be heavily burdened by the war in Ukraine. In addition, German exports to China will be affected by the weaker economic development in China. The high dependence on Russian gas is a major competitive disadvantage for Europe. Here, the economy could come under greater pressure from high energy prices and increasing uncertainty - with Germany as one of the main sufferers. But from a monetary and market perspective, Europe remains better supported: In the event of a victory for Manuel Macron in the upcoming presidential elections in France in April, the ECB is likely to continue to act far less restrictively than the US Federal Reserve in the coming months. Moreover, there have already been massive sales of European equities in the first quarter. This opens up room for optimism again from a market perspective - the market is oversold. Within Europe, the Scandinavian region is likely to have one of the best risk-reward ratios, not least because it is less dependent on energy prices. China, on the other hand, remains difficult to assess: On the one hand, the real estate crisis will not be overcome so quickly - even if state-owned companies are increasingly buying completed flats. On the other hand, the strict zero-covid approach is also hampering economic recovery. We therefore prefer the USA to Europe and within Europe we consider Scandinavia attractive. On the other hand, we remain cautious about the Chinese investment region.

 

Sectors

  • Country breakdown more important than sector breakdown
  • Opportunities for energy and healthcare

We believe that country weighting matters more than sector weighting at this time. In the current environment, healthcare remains an attractive sector both fundamentally and market-wise. In the technology sector, we continue to have a larger underweight relative to both the global index and peers. Earnings growth in the oil & gas and energy sectors should be very good this year. US oil companies could invest significantly more in the future.

 

Equities/Evaluation:

  • Value before growth
  • Pricing power and profitability gain in importance

In recent years, investors have focused primarily on criteria such as sales growth. This could change in the coming years. Criteria such as the pricing power of companies and a strong market position or the ability to maintain margins will become more important in our view. The shares of those companies whose profitability does not deteriorate should do relatively well or outperform in the future. Criteria such as valuation and dividends should also continue to be more important than in previous years.

 

Currencies/Basic Resources/Gold

    • US dollar fundamentally more supported than the euro
    • No exaggerated US dollar optimism in market terms
    • Renewed rise in oil prices likely

From a fundamental point of view, the US dollar should tend to strengthen against the euro; especially with a view to the next 2 years, a stronger US dollar against the euro seems realistic. Positioning data for the US dollar are largely neutral. From a market perspective, there is no extreme US dollar optimism to be seen. A positive correlation for the euro with the US dollar is unlikely and would only occur in the case of pronounced euro optimism, which we do not see at present. We therefore do not consider hedging against the US dollar necessary. In the event of a possible embargo against Russian oil, the oil price is likely to rise significantly again. A gas embargo would most likely lead Europe and especially Germany into a deep recession.

 

Note: This is a marketing advertisement. Please read the prospectus of the relevant fund and the KIID before making a final investment decision. These documents can be obtained free of charge in German at www.dje.de under the relevant fund. A summary of investor rights can be accessed in German free of charge in electronic form on the website at www.dje.de/summary-of-investor-rights. The funds described in this marketing announcement may have been notified for distribution in different EU Member States. Investors should note that the relevant management company may decide to discontinue the arrangements it has made for the distribution of the units of your funds in accordance with Directive 2009/65/EC and Article 32a of Directive 2011/61/EU. All information published here is for your information only, is subject to change and does not constitute investment advice or any other recommendation. The sole binding basis for the acquisition of the relevant fund is the above-mentioned documents in conjunction with the associated annual report and/or the semi-annual report. The statements contained in this document reflect the current assessment of DJE Kapital AG. The opinions expressed may change at any time without prior notice. All information in this overview has been provided with due care in accordance with the state of knowledge at the time of preparation. However, no guarantee or liability can be assumed for the correctness and completeness.