Europe heralds interest rate turnaround, markets remain stable

We remain constructive with regard to the month of June. A massive slump on the markets is not currently expected. Interest rates may have peaked this year and could now fall. Overall, however, the interest rate environment in both the USA and Europe is unlikely to fall as quickly as planned or hoped. Bonds in the medium maturity range remain interesting.

The authors

From the strategy team of DJE Kapital AG 

DJE's strategy team continuously monitors and evaluates the markets using its proprietary FMM methodology based on fundamental, monetary and market technology indicators.  

The current trend on the equity markets, i.e. the outperformance of companies with a high weighting in the indices and therefore a high capitalisation and promising business models, could continue. Temporary setbacks are still seen as buying opportunities. Japan, China and gold remain interesting additions.

Opportunities

  • The interest rate peak should be behind us and interest rates could fall further from now on
  • Shares in companies whose business model is largely independent of the economy, with high margins and structural growth potential
  • In the longer term or with a view to the next ten years, there are few reasons why equities should not perform similarly to the last ten years
  • Japan: Seasonality continues to favour Japan; historically, the second quarter has usually been the strongest quarter for Japanese equities, Japan also has the lowest real interest rate internationally and Japanese equities have the best equity risk premium
  • China: Valuations of Chinese equities are low, many companies have very high cash reserves and share buybacks are increasing. The government is also aiming to strengthen the economy and the capital market

Risks

  • One potential threat to the global economy is the fragility of the US financial system. However, the Americans will not risk a new financial crisis and will take timely countermeasures if problems arise. Risks from the private equity and private credit sectors remain difficult to assess
  • Another Donald Trump presidency would limit the US Federal Reserve's room for manoeuvre
  • Liquidity on the equity markets remains good at present; however, liquidity could deteriorate in the medium term, i.e. over a five-year horizon, and the liquidity issue could therefore have a negative impact. This aspect needs to be monitored closely
  • Mexican investments (in MXN): In principle, the trend of recent years can be continued, but Mexico could come under increasing pressure from the US side; the strategy of going to Mexico to serve the US market could prove dangerous, as the MXN/USD exchange rate could come under pressure, especially if Trump wins the election
  • Geopolitically, the US election is probably the biggest risk at the moment, despite ongoing armed conflicts in Ukraine and the Middle East

Fundamental indicators

  • The US economy will achieve better structural growth than the eurozone economy
  • Even if the USA has recently shown initial signs of weakness, growth is still likely to be significantly higher than in the eurozone in the medium to long term
  • Germany's weakness is weighing on economic development in Europe and the eurozone; Europe's problem remains the low potential growth rate
  • High energy costs continue to be a significant burden for German industry
  • Countries in southern Europe could more than compensate for Germany's weakness, meaning that Europe should grow again in real terms in 2024 and 2025 (0.7% and 1.5% respectively)China: We do not expect a major economic revival for the time being. China is facing a major structural change and property prices are likely to remain under pressure in 2024. In the automotive sector, an aggressive export strategy by Chinese e-car manufacturers is to be expected. In our view, targeted stock picking is called for instead of betting on the broad Chinese market.

Monetary indicators

  • A correction in interest rates of around 100 basis points by the end of 2025 is currently a realistic scenario. We therefore have a completely different situation than at the start of 2024, when a correction of more than 200 basis points was expected by the end of 2025
  • Inflation figures in the US and Europe are likely to remain stubbornly high
  • Following the ECB's first interest rate cut in June, we expect a further rate cut by the end of the year. We expect one rate cut in the US, probably after the US election in November, followed by a further three to four rate cuts in 2025The liquidity situation on the capital markets remains relatively good
  • Donald Trump's election victory should generally have an inflationary effect with a time lag

Market technical indicators

  • From a sentiment point of view, the market technique for risk assets can be regarded as neutral
  • Global fund managers' cash ratios have fallen to 4% for the first time since 2021

 

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