Profitability is the key

In the past years, investors mainly paid attention to criteria such as sales growth. This is very likely to change. Profitable companies with strong market positions, which can pass on prices and maintain margins, will be ahead in the future, in our view.

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

April 2022 was a very difficult month for the stock market: In the USA, the American technology stock market, measured by the Nasdaq 100, plummeted by -13.3% in US dollars and thus suffered the highest monthly loss since the stock market crash in October 2008; the broad US index S&P 500 fell by almost -9% in US dollars and thus had the worst start to the year - viewed over the first four months - since 1939. Nevertheless, we were able to hold our ground well in April with our relatively high equity quotas. Some of our funds even outperformed, including the dividend strategies and an offensive mixed fund.

However, short-term forecasts remain difficult. The harsh market environment gives investors cause for concern for a variety of reasons, most notably the geopolitical risk of Russia/Ukraine, the upcoming interest rate hikes by the US Federal Reserve (Fed) or the monetary policy shift towards monetary tightening, and the economic situation in China. Nevertheless, we believe it is right not to reduce equity quotas at this time. The Fed has raised interest rates by half a percentage point, as expected, and has not been too hawkish. In our view, this could be a recovery signal for the markets and stock prices. This is supported above all by the currently very good market technology: at the moment there is a great deal of pessimism and many market technical indicators are delivering buy signals.

 

Equities/Bonds

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

Mixed funds with high equity quotas have mostly done better this year than those with high bond quotas. In our view, it is still appropriate to focus more on equities. Equity ratios should therefore remain high. We continue to believe that a focus on defensive equities makes sense. Equities of companies with high pricing power and thus stable or ideally rising margins are likely to remain the best investment alternative in the long term. On the other hand, the bond ratio should remain low: 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.

 

Regions

  • USA better than Europe in terms of economic and stock market performance
  • Delay effect of monetary braking could be stronger
  • Within Europe, France remains attractive, while Germany is burdened
  • China remains difficult to assess and risky

There is unlikely to be a recession in the US in 2022. With a labour market as strong as it is today, there has never been a recession in the past. Negative real interest rates and still high investment should also continue to support the economy. With a view to US monetary policy, we are not currently dealing with a classic braking. We do not think it is very realistic that there will be a credit crunch this year, as the liquidity in the market is still very high due to the previous massive stimulus. This could also reinforce the lag effect associated with monetary braking.

Germany and Europe, on the other hand, are likely to be heavily burdened by the war in Ukraine. In addition, German exports to China will be affected by the weaker economic development in China. Within Europe, the French stock market remains attractive: among other things, France is a promising investment region due to a higher level of new debt and a lower dependence of the economy on the manufacturing sector.

China, on the other hand, remains difficult to assess: On the one hand, China's industrial production shrank in April at the fastest rate in more than two years, and on the other hand, the real estate crisis will not be overcome any time soon. So far, China has been very timid in easing and stimulating the economy, and they are not sufficient to compensate for the negative effects of the weakness of the real estate market and the covid-related lockdowns.

 

Sectors

  • Sector selection currently difficult
  • Opportunities for the agricultural and energy sectors

Sector selection is currently much more difficult than country selection. At present, the agricultural sector is attractive both fundamentally and technically and continues to offer a good risk-reward profile. Due to the tight supply situation, the energy sector also continues to offer opportunities. In the technology sector, on the other hand, we remain cautious. Within Germany, we focus on non-cyclical, defensive stocks, e.g. from the insurance and pharmaceutical/healthcare sectors, or on financial stocks, e.g. stock exchange operators. These stocks currently have a significantly better risk-reward ratio than cyclical, heavily energy-dependent stocks.

 

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 now change. 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 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

  • Market and fundamental support for the US dollar stronger than for the euro
  • No exaggerated US dollar optimism in market terms
  • Another oil price increase likely

From a market and also fundamental perspective, the US dollar strength against the euro (and also against most Asian currencies) should continue. Positioning data for the US dollar remain largely neutral. From a market perspective, there is no extreme US dollar optimism. 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 currently see. We therefore do not consider hedging against the US dollar necessary.

The strong US dollar and rising bond yields slowed down the gold price development in April in US dollar terms, but in euro terms the gold value rose by +2.5%. There were fewer gold optimists recently, and net futures long 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 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.