Stock markets will continue to rise worldwide

In an interview with the Börsen-Zeitung, Dr. Jens Ehrhardt reflects on inflation, central bank policy, exaggerations and corrections and the bull market of technology stocks.

Dr. Ehrhardt, U.S. elections and vaccines have recently provided a strong boost to the stock markets. Since the beginning of November in particular share prices have been rising sharply around the world. Is the upward trend likely to continue or is there a threat of a significant correction?

Stock markets around the world will continue to rise, even if there may of course be a pause in the meantime after the sharp increase. This is because the most extreme monetary and fiscal stimulus we have ever seen in economic history is currently taking place. In the U.S.A. the M1 money supply has increased by 71% within a year. Money supply in the euro area and China also continues to expand. Interest rates are down in the U.S. and the euro area, which, by the way, has been the case in Japan for years. In addition interest rates will remain extremely low or negative so the massive stimulus continues. In this environment equities continue to be the first choice.

However, are there currently any exaggerations? Tesla is booming like crazy, Bitcoin is unstoppable, and more and more companies that are not profitable are going public in the US.

In fact, I do not like the market technics so much right now. Bitcoin are being hyped up, the turnover share of small investors is increasing, there is some speculation going on in penny stocks both nationally and cross-border, Gamestop has seen investors buying globally, up to Korean investors and there are indeed also some excesses with regard to IPOs. To be sure market technology can lead to some correction in the short term. In a downtrend or if monetary policy were different and central banks were tightening, I would advise selling now. But at present, monetary stimulus in particular is far too strong to provide a general sell signal. Given this stimulus the equity bull market should continue.

Now, does this not bring back memories of earlier market excesses such as the bubble?

At that time many tech stocks were extremely highly valued and many were not even profitable, which is why I advised an exit. Today individual stocks are highly valued. Across the board the major technology stocks, which are all profitable are certainly highly valued, but they are not all extremely expensive as they were in 2000. At that time interest rates were even higher (6%) compared to now. Today, interest rates are almost non-existent and that has to be taken into account. No, we do not have a situation like in 2000.

Nevertheless, will central banks around the world maintain their very expansionary course? After all inflation rates are rising again, which could put the brakes on the central banks' expansionary course.

If the central banks prick the bubble, which we certainly have in some areas, if it is one at all, that would of course hit the valuations of shares and real estate. By the way the Fed also raised short-term interest rates from 3% to 6% in 1928/1929. All central banks have learned from this wrong behavior of the central bank at that time. Today the Fed remains expansionary and will tolerate even a significant increase of the inflation rate as long as the U.S. labor market does not pick up massively and tightens very much - something we are very far from now. In addition the recent rise in the inflation rate in the USA and especially in Europe is very much due to base effects. This will also become clear in the course of this year. But we are not living in times of galloping inflation.

When are central banks likely to tighten the reins again?

They will not do so in the near future as underlined by recent statements by Fed President Jerome Powell. The ECB under Christine Lagarde also has no interest in tightening monetary policy. On the contrary monetary policy in Euroland is also intended to strengthen the economy, overcome the crisis and reduce unemployment.

Will fiscal policy remain expansionary?

Trump had already stimulated in America, and the fiscal policy of Biden is even more expansive. U.S. Treasury Secretary Yellen has even called Christine Lagarde to push the stimulus. In Europe, too, expansionary fiscal policy is now the order of the day, after Germany had put the brakes on here for many years. Basically, fiscal policy internationally is very expansionary and will remain so in the coming months.

How will the economy and corporate profits develop?

In China the economy is already picking up again significantly. The vaccine has arrived and is being used worldwide. Even though it may take longer than some people expect the global economy is picking up significantly. Corporate profits will climb sharply in 2021 and in the coming years. In the USA, for example, it is estimated that profits will rise by 25%-30%.

The vaccine has arrived, but Corona is far from defeated. Are lockdowns threatening setbacks on the stock market?

Of course, there are companies that are suffering particularly from the lockdowns, for example in the travel and tourism industry. However, despite the lockdown almost all industrial companies are continuing to perform well, even here in Germany. In addition tech stocks are benefiting worldwide from increasing digitalization. The development is therefore very different.

Will the bull market in technology stocks continue or will cyclicals come back stronger?

As the economy and corporate earnings recover cyclical stocks and value stocks will become more interesting again. However I would only sell tech stocks if they are overvalued: they are growing much faster than other companies and are long-term winners. However, the outperformance of tech stocks is unlikely to be as pronounced this year as it was in 2020.

Which regions do you prefer? Are China and Asia attractive, is Europe coming back?

In the long term equity investments in Asia and China are more attractive than Europe. Asia has a younger population, greater growth and is more sensitive with regard to the capital markets. In this respect equity investors should also be invested in Asia, if possible.

What do you think of the prospects for the German stock market?

As a performance index the Dax is unique in an international comparison. If you look at the price Dax, the Dax today is at about the same level as in 2000 and has practically not moved. By international standards, the Dax is by no means expensive and an upward breakout is quite likely. A rise to 16,000 points this year is quite possible.

How should investors structure their portfolios now?

Large investors in particular who have investment pressure and are still primarily involved in interest rate products will increasingly move into equities. On the bond side, there are no longer any returns worth mentioning - and that will remain the case for some years to come. In addition holding liquidity actually costs money in the euro zone. In view of this, a high equity allocation also makes sense for private investors. However, they should invest as internationally and broadly diversified as possible, with the focus on cyclical value stocks.

How do you rate gold?

After the gold price dropped back in recent months, while the inflation rate is currently rising, gold could now slowly be in somewhat higher demand again. Mainly platinum could be interesting among the precious metals due to industrial demand. In order to diversify and stabilize a portfolio, in addition to stocks, a smaller share of precious metals is definitely useful. Since there is almost no interest anymore, bonds are no longer attractive as addition to the portfolio.

What else is there to say?

Both institutional and private investors currently have a lot of money urging them to invest wisely. For example, US institutional investors are currently less invested in equities than a year ago. Moreover, here (and internationally) the savings rate of private individuals has risen massively because of the pandemic. However where will the abundant liquidity flow to in an environment where there are no more interest rates but where the economy is growing and corporate profits are rising? The answer is obvious: largely into equities.



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