Short-term market recovery possible

There are various reasons for a short-term market recovery in September. In the medium term, however, we remain cautious, as economic risks are increasing, not least in Europe. We see potential in Japan and in companies that can benefit from the US Inflation Reduction Act.

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 

 

We still consider caution to be appropriate in September, even if a (market-technical) recovery is possible in the short term. There are several reasons for this: Seasonally, September is often a rather difficult month. Monetarily, the situation continues to be negative. Although the US economy is holding up well, the economic risks in Europe continue to increase. Market indicators have clearly improved in recent weeks and offer some short-term recovery potential. In the medium term, however, the general market outlook remains difficult. With a focus on special situations (see Opportunities), it should be possible to weather this phase well.

Opportunities

  • Japan offers potential
    The Land of the Rising Sun offers relatively good money supply growth thanks to the hardly changed expansive key interest rate policy. Moreover, it is currently benefiting from "near shoring", i.e. the outsourcing of production from other countries in the region to Japan. Finally, the Japanese equity market is not overweighted in global funds and is not analytically expensive.
  • Energy sector with improved environment
    The fundamental environment of the energy sector should tend to improve. Among other things, drilling activity in the US is declining and there is strike risk at liquefied natural gas (LNG) production facilities in Australia, which should lead to rising energy prices. In addition, the sector is not overweight in global funds.
  • US Inflation Reduction Act
    Companies based in the US and those moving all or part of their production there may benefit from the US Inflation Reduction Act and thus experience a fiscal stimulus.
  • Utilities
    We also see opportunities in selected companies from the utilities sector and the private equity segment.

Risks

  • Declining money supply
    In the USA and Europe, the M1 money supply aggregates are clearly declining. The M1 money supply consists of the demand deposits of non-banks and the currency in circulation in the euro area. Sight deposits refer to bank balances for which there is no specific maturity or period of notice. According to our in-house FMM model, the investment environment has recently deteriorated further.
  • Recession in Germany and Europe
    In Germany, the recession has already set in with two consecutive negative quarters, and in Europe it is coming: a deep and prolonged recession. We avoid equities that are heavily dependent on German or European domestic consumption.
  • Automotive and chemicals sectors
    Germany's key automotive and chemical sectors are likely to face difficult times as their international competitiveness is likely to decline for various reasons (e-mobility pressures on combustion margins and strong e-car competition from the US and China and high energy costs, respectively).

Fundamental Indicators

  • USA: Recession or "soft landing"?
  • Japan with good development
  • China as a "brake on growth
  • Germany and Europe in recession

The key question is whether there will be a recession in the USA or not. At present, US corporate profits are still developing well for the most part and a "hard landing" is not priced in by most market participants, but we cannot rule out negative economic surprises. For example, domestic consumption in the US could fall and the savings rate could rise more strongly again - it has now fallen from 8% to 4%. The IRA (Inflation Reduction Act) remains an important support for the economy and the US industrial sector.

Japan offers one of the best money supply growth rates in the world thanks to its hardly changed expansive interest rate policy. It is also currently benefiting from "near shoring", i.e. the outsourcing of production from other countries in the region to Japan. The Japanese purchasing managers' indices for the manufacturing sector and the service sector are both in expansionary territory and thus signal future economic growth.

China, on the other hand, is not getting off the ground and is currently more of a "brake on growth" than a "growth engine" for the global economy. There is no major fiscal stimulus in sight. The real estate market is heavily burdened and there is a noticeable loss of confidence in wealth management products. Chinese equities currently appear very cheap. Nevertheless, from our point of view, the general conditions, also politically, currently speak more in favour of the US equity market.

In Germany, the recession has already set in with two consecutive negative quarters, and in Europe it will come: a deep and prolonged recession. The economic risks continue to increase, for example, the purchasing managers' index for industry in the euro area is deep in recessionary territory and the index for the service sector has slipped into recessionary territory.

Monetary Indicators

  • US key interest rates will put the brakes on
  • US inflation on target in short term
  • ECB has missed target

In our view, interest rates in the US are at (too) high a level compared to growth, and the high rates should lead to a braking effect sooner or later.

In the short term, overall inflation in the USA is already within the Fed's target range. A further increase in the key interest rate in September or November is not ruled out, although a further increase could turn out to be a political mistake.

The Fed has managed to push back the core inflation rate. Here, in principle, only housing costs are still driving up inflation. The ECB, on the other hand, has achieved practically nothing: inflation is still high and the economy is sputtering. Because inflation is still high, the ECB has little room for manoeuvre to lower interest rates in order to revive the economy in the euro area in relative terms. Moreover, unlike the US, the euro area is dependent on energy imports. If the price of energy rises again in the fourth quarter due to seasonal factors, overall inflation may also rise again.

Market Technology Indicators

  • Positive: sentiment slumped
  • Negative: falling advance-decline line

In the short term, the great optimism on the markets has disappeared or sentiment has collapsed. This becomes clear in the rise of the put-call ratio, i.e. more puts are being bought than calls, and the "Fear&Greed" index tends towards fear rather than greed. In addition, the NAAIM index (National Association of Active Investment Managers) showed a significant decline. This indicator shows how strongly the members of this association (including asset managers and fund managers) are currently invested in equities. Taken together, these signs speak countercyclically for a short-term recovery of the market.

On the other hand, the Advance Decline line has fallen. This AD line is an indicator of chart technique for determining the trend in an overall market. To calculate it, all shares in a market with a daily loss are subtracted from the shares with a daily gain. In the past, falling or poor AD lines have been a precursor to bear markets.

 

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