Ahead with caution

Looking ahead to May and the months ahead, DJE's strategy team believes that a higher level of caution is justified. While interest rates should not rise further, interest rate levels are likely to remain high for longer than the market expects. Moreover, the delays with which tighter monetary policy will take effect have not yet been priced in.

The authors

DJE's strategy team continuously monitors and evaluates the markets using its proprietary FMM methodology based on fundamental, monetary and market technical criteria.  

From the strategy team of DJE Kapital AG 

Many stock markets have performed well in the first four months of 2023. The next few months could now become more challenging. Seasonality suggests that stock market returns tend to be weak between May and October; beyond that, the monetary situation on the markets is still restrictive. In general, in the view of the DJE strategy team, interest rate hikes are no longer to be expected. But looking ahead to the second half of the year, the market's expectations that there could be interest rate cuts seem too optimistic to us. Core inflation is still too high for that and is also likely to decline at a slow pace. In addition, bank lending is decelerating, which will slow down economic growth. Regionally, we see opportunities in Asia, especially in China and Japan. In addition, we still consider the risk-reward ratio of bonds with attractive yields to be appealing.

Fundamentally Indicators

  • Recession in the US likely
  • Deterioration in lending and delayed effect of monetary policy is a burden, especially with a view to 2024
  • Utilities structurally interesting
  • Opportunities in China

Fed Chairman Powell continues to believe in a soft landing of the US economy rather than a recession. We are not so optimistic and currently consider it unlikely that a recession can be completely avoided in the USA. Commercial real estate loans remain a risk factor, especially for US regional banks. Problems in the banking sector and a slowdown in inflation momentum are likely to entail that we have now reached the end of the US cycle of interest rate hikes. This development supports the technology sector. In our view, this sector is not overvalued in absolute terms and relative to its own history, but it is highly valued compared with other sectors. 

Economic risks are also increasing in Germany. The real estate market is one of the main sources of risk: some real estate companies could run into difficulties, which would then put pressure on the banking sector. Bank lending will deteriorate, both in the USA and in Europe. In the medium term, this should lead to weaker leading indicators and weakening profits in some sectors. By contrast, another sector is structurally interesting for us in Germany and Europe: utilities. Electricity prices in Germany have come back nowhere near as strongly as gas prices, for example. 

Looking ahead to 2024, many growth forecasts seem too optimistic to us: the delays with which the restrictive monetary policy will take effect have not yet been priced into the current forecasts. 

We currently see opportunities in China: there, the service/travel sector in particular is developing very well. In the real estate market, the situation is stabilizing, and prices are already rising again in many cities/regions. However, it is likely to take some time before the revival of the Chinese real estate market also has a positive impact on commodity demand. In addition, Chinese banks are currently performing relatively well. 


Monetary Indicators

  • Headline inflation declines, core inflation remains sticky 
  • Further upward and downward interest rate changes unlikely 
  • Selected high-quality bonds with attractive yields 

U.S. headline inflation should continue to decline in the coming months. In the euro zone, overall inflation should also fall, driven by energy prices. By contrast, core inflation (excluding energy and food) should decline more slowly. With core inflation remaining high overall, rapid interest rate cuts appear unrealistic. However, further interest rate hikes are also unlikely in the USA. 

In general, the market takes a much more optimistic view of interest rate developments than the members of the Federal Reserve's Federal Open Market Committee (FOMC). Interest rates could remain higher for longer than the market currently expects. 

Bonds: For the time being, we continue to stick with a duration that tends to be short. A lot seems to be priced in for the 10-year U.S. government bonds (well below FED funds), while the interest rate level of German 10-years appears relatively unattractive at 2.25%. Bonds with a maturity of 2 to 4 years are more interesting in our opinion. 


Marktet Technique

  • Strong pessimism an anti-cyclical buy signal 
  • Seasonality makes strong stock market performance unlikely 

Market technical indicators continue to support the ongoing stock market rally. There is not too much optimism in the markets, and there are high short positions on the broad U.S. equity index S&P 500, which is positive as sentiment is less likely to turn to disappointment on potential bad news. In this context, the strong pessimism in AAII (Association of American Individual Investors) investor surveys in the U.S. is a countercyclical positive buy signal. However, in contrast to the previous month, the seasonal rhythm is now entering a more difficult period. There is a lack of market breadth: This year, stock market rallies in the U.S. and Europe have been or are being driven by only a few large stocks. In addition, volatility is low. 


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