Good times for stock pickers

In an environment of high inflation and rising interest rates, equities will remain attractive in 2022. This year, investors could look specifically for those companies that offer a reasonable valuation and healthy 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

2022 could be a year of value stocks(1) and equity valuations are likely to be more in investors' focus in 2022. In our view, inflation will remain high and market interest rates could rise faster and more than investors expect today. In terms of equity ratios, we will remain highly invested, but more likely to shift towards value again. In our view, caution is warranted in highly valued growth and quality stocks, and we will not overweight these.

 

Fundamentally

  • China remains difficult to assess and risky
  • Focus on attractively valued companies with acceptable growth and high pricing power(2)

In our opinion, the economic development could continue to surprise positively in Europe and the USA in 2022. Europe could have more tailwind than the USA due to the stronger monetary stimulus from the European Central Bank ECB. The situation in China is likely to remain difficult for the time being: The Olympic Games will most likely increase the number of covid cases in China. If China continues to govern with a "zero covid policy", this is likely to put further pressure on economic development in China. This would put renewed pressure on global supply chains, which would lead to higher logistics costs. Against this background, China and China-dependent equities are difficult to assess for the time being. We also remain cautious here for the time being due to weak money supply growth in China. In general, equity valuation is likely to play a more important role in 2022 than in recent years. The value category remains promising. We focus on shares of companies that are not too expensive and have reasonably good growth and pricing power.

 

Monetary

  • Inflation will remain high in 2022
  • Market interest rates may rise more than expected

The inflation trend will remain one of the dominant topics on the capital markets. Although we continue to assume that there will be relief, especially from the second half of 2022 onwards, inflation is likely to remain at a high level in general. Market interest rates could therefore rise faster and more strongly than expected, as current inflation expectations are likely to be exceeded. We are therefore sticking to short durations for our selected bonds. In March, the US Federal Reserve (Fed) will also comment on the planned reduction of its balance sheet total. This poses a certain temporary risk for the equity market. Interest rates should continue to rise, but not to an extent that would be dangerous for the equity markets. In general, however, the (US) bond markets in 2022 are likely to be determined more by investors than by central banks. In Europe, on the other hand, a tapering discussion is still far away, so Europe appears more attractive from a monetary perspective.

 

Marktet Technique

  • No deterioration compared to previous month
  • High pessimism on the bond market

The market technique has not worsened compared to the previous month. The NAAIM(3) indicator, which measures the investment quotas of institutional investors, is currently back at just under 90% (after below 70% at the beginning of December), but the US put/call ratio(4) is still in neutral territory. On a positive note, the cash ratio of global fund managers is back in the buy zone at 5.1%. On the other hand, market breadth looks worse, as measured by the Advance Decline lines(5) (e.g. Nasdaq AD line). The high pessimism for bonds continues to be a countercyclical positive.

 

Sectors/Countries

  • Balanced portfolios advantageous
  • Value segments attractive
  • Expensive growth and quality stocks unattractive

We continue to focus on a balanced portfolio allocation. Rising interest rates should help the value category (e.g. banks, insurance, oil & gas, chemicals and other cyclical stocks). We are committed to further increasing the weightings in the value segment. There is much to suggest that value stocks will do better in 2022 and that 2022 could be a good year for dividend stocks - similar to what happened after the bursting of the technology bubble from 2004 onwards. To be sure, we are not ignoring profitable growth stocks. But in our opinion, caution is still advisable for highly valued technology and growth stocks. Regionally, we continue to favour Europe and the USA over emerging markets.

 

Currencies/Commodities/Gold

  • US dollar strength could continue due to tighter Fed policy
  • Precious metals and commodities remain under pressure
  • Gold largely neutral

The recent dollar strength could continue on trend due to the less expansionary US Federal Reserve policy compared to Europe. Commodities and precious metals are generally suffering from the strength of the US dollar. We have a largely neutral view on gold. ETF demand is still not picking up, and rising bond yields could be a burden here.

 

 

1             Value strategy: The value strategy is based on the idea that companies can be found on the stock market whose actual value is not yet recognised by market participants (undervalued companies).

  1. growth strategy: The growth strategy focuses less on analysing individual companies and more on looking at 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.

2             Companies with high pricing power are those with strong brands, such as the iPhone giant Apple, or those that have occupied a strong market position, such as the software manufacturer Microsoft or the online retail giant Amazon.

3             NAAIM (National Association of Active Investment Managers): The NAAIM exposure index tracks the average exposure of its members to the US equity markets. The NAAIM index is not forward-looking, but provides insight into the actual adjustments that active risk managers have made to client accounts over the past two weeks.

4             Put/call ratio = ratio between call and put options. If put options predominate, the prevailing opinion is that this indicates negative market sentiment (stock market sentiment). If, on the other hand, call options predominate, this indicates a positive market sentiment from this point of view. In fact, a rise in prices can often be observed after high put-call ratios. The PCR is therefore considered a contra indicator. It should be noted that under normal conditions fewer put options are demanded than call options; a balanced PCR close to 1 is therefore already considered an indication of slightly negative market sentiment.

5             AD line (Advance Decline line): Market breadth indicator that shows whether more stocks are rising or falling. In order to make a statement about the health of the broad market, indicators measuring market breadth are sometimes better suited than a stock index. Especially in the case of trend reversals (top and bottom formations), the "classic" stock indices are rather sluggish. This means that if, for example, a new bear market emerges and a large number of shares have already fallen sharply, this is only recognisable in the index quite late.