Prudent monetary policy good for stock markets

Concerns about growth override those about inflation. In this environment, hopes are rising for a more moderate monetary policy by the US Federal Reserve. In Europe, on the other hand, the interest rate turnaround is still pending. Monetary policy on autopilot is likely to hurt the stock markets, but a sense of proportion would be beneficial.

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

 

May 2022 was not an easy month on the stock market either - after a very difficult April. Nevertheless, we were able to hold our ground well in May with our relatively high equity quotas. Some of our funds even outperformed, including the dividend strategies, an offensive mixed fund and an asset management fund. Short-term forecasts remain difficult for the time being. The market environment continues to give investors a stomachache for a variety of reasons, most notably the geopolitical risk of the Russia-Ukraine war, interest rate hikes or monetary tightening by the US Federal Reserve and China's economic situation. Especially the monetary indicators do not look good in the short term. The market technicals are still very good: there is still a very high level of pessimism and many market technical indicators are therefore providing buy signals.

 

 

Equities/Bonds

  • Selected bonds offer opportunities again
  • Defensive equities remain in focus

In the current year, mixed funds with high equity quotas have mostly done better than those with high bond quotas. In the meantime, in our view, the high yield levels are again creating individual investment opportunities in fixed-income securities: In the US one can again find bonds with yields of 5 to 6%, and there are European bonds that yield more than 4% with not too long a maturity. On the equity side, we still consider a focus on defensive equities to be sensible. High-quality companies with strong pricing power that generate solid profits even in a low-growth environment are likely to remain the best investment alternative in the long term.

National economies/regions

  • Countervailing inflation effects
  • Medium-term inflation and interest rate expectations are already declining
  • Situation- or data-dependent Fed policy could help the stock market
  • China remains difficult to assess and risky

If the US Federal Reserve continues its process of raising interest rates and reducing liquidity (quantitative tightening) on autopilot, it will probably be difficult for the US economy and thus also for the US stock markets. However, there is also positive news and countervailing inflationary effects on the economically dominant topic of inflation: The availability of goods is improving. Especially for semiconductors, inventories have been rising again for some time. Online advertising is currently becoming cheaper, and more staff in the higher income segment (including IT specialists) are available again. Minimum wages continue to rise, but the pressure on wages for highly qualified staff is decreasing. Some large companies seem to have hired too much staff and are already laying off again, such as large US internet companies. Medium-term inflation and interest rate expectations (for the next 2, 5 and 10 years) are therefore already declining. It could help the stock market if the Fed shapes its monetary policy depending on the situation and data. China remains difficult to assess: The problems in the real estate market remain. In addition, very little land is being sold, and thus the municipalities also lack the money to stimulate the economy, e.g. through infrastructure investments. The overall economy in China remains depressed. There are selective opportunities, but overall we are cautious about China as an investment region. 

 

Sectors

  • Consumer staples often too heavily overweighted
  • „Bombed-out" tech stocks could offer opportunities again

Sector selection remains difficult. Consumer staples are currently heavily overweighted among many investors. We believe it makes sense to reconsider larger overweights in this sector. On the other hand, the heavily battered technology stocks could offer opportunities again. Chinese tech stocks are also very cheaply valued and could benefit from easing regulatory pressure in the medium term.

 

Equities/Evaluation:

  • Value before growth
  • Pricing power and profitability are decisive criteria

In recent years, investors have focused primarily on criteria such as sales growth. This could change in the next few years. In our view, criteria such as the pricing power of companies and a strong market position or the ability to maintain margins will become more important in the coming years. The shares of those companies whose profitability does not deteriorate are likely to 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 moves sideways
  • Rising bond yields slow down gold

If the US economy weakens, the US dollar could tend to weaken. We therefore expect the US dollar exchange rate to move sideways. Europe is also facing economic headwinds. But should ECB chief Christine Lagarde raise interest rates in Europe, we believe she will do so very slowly. We therefore do not consider US dollar hedges necessary at the moment. The gold price performed disappointingly in May, both in US dollars (-2.9%) and in euros (-4.4%). Above all, rising bond yields had a negative impact on the gold price development. A sideways development of the US dollar would tend to have a positive effect on the gold price. There were fewer gold optimists recently, and net long futures contracts declined again. However, gold retains its "hedge/hedge character", e.g. in case of a further geopolitical escalation. In our view, gold should therefore remain a portfolio component. 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 sharp 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.