Price potential and inflation
High corporate profit expectations suggest further price potential for the stock markets in the coming months. Increased inflation accompanies the well-performing economy, but without triggering further shocks. As the excessive optimism has cooled down again, an abrupt disappointment of investors is unlikely.
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
Our forecasts from the strategy meeting at the beginning of May have largely come true: The global stock market has largely moved sideways in the past month. There was no "Sell in May". Historically, June tends to be a weak stock market month. Nevertheless, we are relatively confident for the current month and the months to come. On the one hand, the market technique has improved in May as investor optimism has declined. On the other hand, there is no need to worry about the economy at the moment, as corporate profits should continue to develop well in the second quarter. We still have to watch out for inflation. We expect higher inflation rates in the coming months. However, the central banks in the USA and Europe have already taken precautions and classified the inflation issue as temporary. We therefore do not expect stronger interest rate increases in the short term, which should lead to real interest rates remaining clearly in negative territory. This in turn is positive for equities and real assets. Cash and, to a large extent, bonds are no investment alternatives, so we are maintaining our high equity quotas.
- The global economy continues to perform well
In the second quarter, the profit development of most large listed companies should also be good. Based on current earnings estimates, the DAX could rise by a further 1,000 points (currently only around 400 points short of the DJE target of 16,000). This would correspond to a 2021 P/E ratio1 of around 15, which is not too high in a historical context. Rising raw material prices will weigh on margins in some areas in the second quarter, but these product cost increases can be passed on by companies with high pricing power2. There is currently no overcapacity in many sectors, on the contrary: very many products are currently in short supply. Companies are also increasingly using the very good generation of funds and the ample supply of liquidity for share buybacks. In addition, an increase in M&A3 activities can also be observed.
- Higher inflation figures are also to be expected in the coming months
- Surplus liquidity decreases somewhat due to good economic development
The inflation trend remains the dominant topic on the capital markets. We expect inflation to remain elevated in the coming months (USA: 4-5%). In our opinion, these higher inflation figures should no longer trigger shocks. If inflation turns out to be higher than expected, central banks will most likely try to calm things down and intervene if tightening discussions arise ("tapering"). We do not expect galloping inflation, which some fear, due to the numerous one-off effects. We also consider sharply rising interest rates unrealistic in the short term. With a view to the bond markets, we are maintaining our short duration. We do not expect an additional boost to inflation from strongly rising wages (second-round effect) at the moment either. In the US, for example, only 8% of all workers are unionised, and minimum wages, which could rise if the service sector picks up again, represent only 7% of all wages. Many cyclicals continue to benefit from tight commodity availability, as many companies have high pricing power. Real interest rates are likely to remain in negative territory in both the US (most recently -2.6%) and Europe. Real assets such as equities and precious metals or even real estate (e.g. in the UK) are likely to remain in demand in the scenario of negative real interest rates.
- Situation has improved in the last four weeks
"Sell in May" was a hotly debated topic at many major US banks, but it did not happen. Currently, the market is also no longer as tense as it was a good four weeks ago. For example, the NAIIM4 indicator, which measures the investment quotas of institutional investors, is currently at 68% (after 104% at the beginning of May), and the cash holdings of fund managers are in neutral/positive territory at 4.1%. Overall, the market technique has thus improved compared to last month, because the investors' optimism, which was exuberant in the meantime, has cooled down again.
- Balance before sector focus
- Regionally, the UK could outperform
We continue to recommend a balanced portfolio allocation and no massive overweights or underweights. It is conceivable that the UK will emerge stronger from Brexit. House prices have recently improved more strongly there, and British domestic stocks could also be interesting. We continue to regard stocks from the construction sector as promising.
- USD/EUR exchange rate still assessed as largely neutral
- Commodities and gold remain positive
Currently, we see the USD/EUR exchange rate as largely neutral. In general, the currency development remains the most difficult to assess. The US dollar could tend to remain burdened by the massive double deficit (budget and trade balance). Gold and commodities should remain supported by the negative real interest rate environment.
1 DAX P/E ratio: The price-earnings ratio of the German Share Index puts the index score in relation to the profits of the companies listed in the DAX. Over the past 30 years, an average DAX P/E ratio of 19 has been measured. P/E ratios below this mark signal a favourable valuation of German shares from the perspective of balance sheet analysis, while DAX P/E ratios above this mark can be said to indicate an overvaluation of the stock market.
2 Companies with high pricing power are those with strong brands, such as the iPhone giant Apple, or those that have occupied a strong market position, such as the software manufacturer Microsoft or the online retail giant Amazon.
3 M&A (Mergers and Acquisitions) = mergers and acquisitions.
4 NAAIM (National Association of Active Investment Managers): The NAAIM exposure index tracks the average exposure of its members to the US equity markets. The NAAIM index is not forward-looking, but provides insight into the actual adjustments that active risk managers have made to client accounts over the past two weeks.