Oversold markets: use temporary recoveries for defensive positioning
The authors: DJE's strategy team monitors and evaluates the markets on an ongoing basis using the in-house FMM method according to fundamental, monetary and market-technical criteria.
Following the sharp market decline in March and the first few days of April, we believe a technical recovery is possible. In general, the markets are currently oversold. Pessimism has recently risen massively and some technical market indicators are clearly in the buy zone. Positive news, such as the suspension of reciprocal tariffs by Donald Trump for 90 days, can trigger temporary rallies. Investors should take advantage of a recovery on the markets to remain defensive for the time being.
In general, we expect a difficult second quarter and first half of 2025. 2026 could then improve again. The greatest risks are currently likely to come from the bond market in terms of a further rise in yields on long-dated bonds. This refers to the issue of "Mar-a-Lago-Accord" or the idea of restructuring US bonds into extremely long maturities. The upcoming reporting season could also be a burden, especially with regard to negative comments on the expected further business development in 2025 as a whole. Our main hope remains that the US central bank will step in to help or that there will ultimately be negotiations on tariffs between the US and the major economic areas such as the EU.
Opportunities that we see:
Market technicals reflect extremely high pessimism and an oversold situation. Even slightly positive news, such as the announced suspension of tariffs for 90 days, can trigger a strong temporary recovery.
It is possible that most of the downward movement is already behind us. If we compare the current situation with previous phases in which a recession occurred, we may have already seen up to two thirds of the expected price decline.
Germany and Europe (but more with a view to 2026): The German new debt package could have a positive effect on the German economy and selectively benefit sectors such as construction, defense, chemicals and industry - but in the longer term probably only if structural reforms are also tackled at the same time. Europe could generally perform better than the US in 2025. The ECB will and must cut interest rates further. The next rate cut is expected on April 17. Selected European companies that can reduce costs and are less affected by tariffs therefore offer opportunities.
China also offers selective opportunities. Although the real estate market remains difficult, it is at least no longer deteriorating or is stabilizing. We see the increased fiscal policy stimulus from the government, which will see record levels of new government debt in 2025, as positive. The stimulus in China is an important factor that speaks against a global recession.
Risks that we see:
A renewed escalation of the trade war between the US and China or the US and Europe cannot be ruled out. US tariff policy is leading to a high level of uncertainty among companies and consumers. US leading indicators such as the ISM Manufacturing PMI have recently fallen significantly, as has US consumer confidence. The risk of a US recession has recently risen more sharply and the US economic outlook has deteriorated massively.
US bond market: The plans to restructure US bonds into extremely long maturities ("Mar-a-Lago Accord") were penned by Trump's chief advisor Stephen Miran and could weigh heavily on the stock markets if they are actually implemented.
US trade policy will continue to occupy the markets. Trump's planned tariff measures could have negative implications with a time lag, such as a new, stronger inflationary impulse and thus higher interest rates at the long end.
In general, investors should be cautious with equities that are highly valued and show market weakness.
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