A defensive and balanced start to autumn

Concerns about corporate earnings, inflation and China are likely to continue to depress market sentiment in the forthcoming month, therefore we are positioning ourselves more defensively.

The authors

The analyst team at DJE 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 results once a month.

Statement of the analyst team of DJE Kapital AG

 

In September the MSCI World Index fell by -4.3% in USD terms. Historically a difficult September has often been followed by a difficult October. In the past October was usually also the most volatile month of the year. At present fears of inflation and interest rate increases as well as concerns about the Chinese economy burden the markets. These problems are likely to persist for the time being worsening the risk-reward ratio1 overall. As a result we are temporarily holding slightly higher cash quotas, are positioning ourselves more cautiously and continue to be balanced without large sector overweights or underweights. However, we do not expect a bear market according to classical monetary theory triggered by a braking policy or a liquidity shortage in the system.

  

Fundamentally

  • Slowing consumption and declining production in many parts of China's manufacturing sector
  • Pressure on Chinese (and in some places Western) corporate profits

The problems concerning China's real estate giant Evergrande and the consequences for the entire Chinese real estate market may have been underestimated so far and could burden the Chinese economy longer than expected. The Chinese real estate market is the largest asset class in the world, worth around 60 trillion US dollars. Problems in the real estate market or declining prices could depress the wealth effect and thus weigh on Chinese consumption more than expected. In addition, there are problems in the manufacturing sector, for which the state is also responsible: electricity is being cut off in part by state order, as China faces an energy shortage caused by scarce coal supplies, tighter emission standards and strong demand from manufacturers. Profits of companies with strong exposure to China could therefore come under pressure. For Hong Kong-listed companies, this development seems to be priced in already, but the China profits of many Western companies could be weaker than expected for the time being.

Monetary

  • Higher inflation environment should continue
  • Base scenario remains a normalization of inflation rates in 2022 and hardly any interest rate steps in 2022/2023

The inflation trend remains one of the dominant topics on the capital markets. We expect inflation to remain high for the coming months before normalizing within the next twelve months. Most recently the development of US wages and, above all, the increase in energy and electricity prices are worrying. There is a danger that energy prices and wage developments will drive inflation more strongly than the central banks assume in their forecasts. Then they would have to become more restrictive after all. The development must therefore continue to be monitored very closely. Persistently high inflation rates put further pressure on Fed President Jerome Powell and the US central bank will probably soon begin its tapering process, i.e. the reduction of bond purchases. Bond purchases could then be reduced to zero by the middle of 2022. In Europe, on the other hand, a tapering discussion is still fare away therefore Europe appears more attractive from a monetary perspective.

 

Marktet Technique

  • Improved compared to previous month
  • Fundamental and monetary factors currently predominate

The market technique has improved compared to previous month. For example, the NAAIM2 indicator, which measures the investment rates of institutional investors is currently back at 55% (after 94% at the beginning of September). The US put/call ratio3 is back to neutral (after an overbought situation in early September). However, the monetary and fundamental factors are clearly predominant at the moment so that we are currently not relying too much on improved market technology.

 

Sectors/Countries

  • Continue to pay attention to balanced portfolios in general
  • Do not overweight or underweight portfolios too much 
  • Prefer defensive stocks

We maintain a balanced portfolio allocation without strong overweights or underweights. Globally, the energy sector in particular performed very well in September. Energy should continue to be a profitable sector. The insurance sector also looks interesting. The health care sector, especially in the USA, seems to us to be favorably valued compared to the market. In our opinion caution is advisable for highly valued technology companies. This also applies regionally to China for the time being. On the other hand, we continue to consider the Japanese market attractive. In September the Japan's stock market was one of the best in the world. 

 

Currencies/Commodities/Gold

  • Dollar strength could persist
  • Precious metals and commodities under pressure

The recent strength of the dollar could continue. Commodities and precious metals in general are suffering from the strength of the US dollar. Commodities in general would also face headwinds from a more pronounced economic slowdown in China. The oil market could remain tight as some OPEC countries hardly increase production and US producers fail to return into the market more strongly. We have a broadly neutral view on gold. However, ETF demand remains below average. Gold, on the other hand, should remain supported by the negative real interest rate environment.

 

1 Risk-reward ratio (CRV): Key figure for investment decisions. The CRV describes the ratio of the expected profit (price target=chance) to the possible loss (risk). This loss is usually limited by a stop. The difference between the entry price and the price target defines the opportunity, the difference between the entry price and the loss-limiting stop defines the risk.

2NAAIM (National Association of Active Investment Managers): the NAAIM exposure index tracks the average exposure of its members to the U.S. equity markets. The NAAIM index is not forward-looking, but provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks.

3 Put/call ratio = ratio between call and put options. If put options predominate, the prevailing view 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 is often 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.

 

 

Note: All information published is for your information only and does not constitute investment advice or other recommendation. Long-term experience and awards do not guarantee investment success. Securities are subject to market-related price fluctuations which may not be compensated for by the active management of the asset manager or investment advisor. This information cannot replace a consultation. All information has been provided with care and to the best of our knowledge at the time of preparation. Despite all due care, the data may have changed in the meantime. Further information on opportunities and risks can be found on the website www.dje.de. The sales prospectus and further information are available free of charge in German from DJE Investment S.A. or at www.dje.de The fund management company is DJE Investment S.A. DJE Kapital AG is the distribution agent. A summary of investors' rights can be obtained free of charge in German in electronic form on the website at www.dje.de/zusammenfassung-der-anlegerrechte. The funds described in this marketing document may have been notified for distribution in different EU Member States. Investors' attention is drawn to the fact that the relevant management company may decide to withdraw the arrangements it has made for the distribution of the units of its funds in accordance with Article 93a of Directive 2009/65/EC and Article 32a of Directive 2011/61/EU.