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 criteria.
The recent turbulence on the markets confirms our rather cautious assessment from last month (see previous outlook). This was triggered by a mixture of negative US economic data, the unexpected interest rate hike by the Bank of Japan and the associated problems caused by interest rate carry trades between the yen and the US dollar. Nevertheless, we believe that most of the correction is probably already behind us. You can read a comprehensive assessment of the background here.
Interest rate cuts expected in September
The economic situation in the USA remains under pressure, as can be seen from the disappointing labour market data and cautious consumer behaviour. We do not expect the US Federal Reserve to cut interest rates. Instead, we continue to assume that US key interest rates will be lowered by 50 basis points in September and that further interest rate cuts will follow in the fourth quarter and the two subsequent years.
We therefore see the neutral interest rate level in the USA at around 2.75%. Although a recession or a hard landing for the US economy is technically possible under these circumstances, it is not our expected baseline scenario.
Uncertainty yes, further corrections unlikely
Looking ahead to the next few weeks in August and September, the current phase of heightened uncertainty is likely to continue, albeit without any further major sell-offs. Although a temporary recovery of the equity markets is possible from a technical market perspective, it would also entail a temporary consolidation of the bond markets. Should such a consolidation phase occur, this could be used to extend the duration again.
Weak US consumption and the weakening US economy are likely to put further downward pressure on inflation, meaning that the risk/reward ratio on the bond side remains good in the medium term.
Opportunities in Japan despite sell-off?
Although Japan experienced its biggest daily decline since 1987 on Monday, August 5, we are sticking to our positive Japan forecast following the decline in the current volatility. Japan continues to have the lowest real interest rate internationally and Japanese equities the highest equity risk premium. At the same time, the earnings prospects for Japanese companies remain good overall. Within Japan, we continue to favor domestically oriented stocks and financials over stocks that are heavily dependent on exports.
In addition, we continue to see opportunities in shares of companies whose business model is largely independent of the economy and promises high margins. Ideally, they should also have a certain cost-cutting potential. Stocks from the utilities, healthcare and consumer staples sectors could benefit from the interest rate cuts, although the latter should be as defensive as possible.
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 past ten years.
We are monitoring these risks
It is not yet possible to fully assess whether the interest rate carry trades between the yen and the US dollar will lead to further distortions. We are monitoring the situation on an ongoing basis. We are also continuing to focus on the weakness in US consumer spending already discussed, although the earnings outlook for consumer-related sectors is not under pressure for the time being.
Support from US fiscal policy is currently not in sight, as it is currently less expansive and therefore not as stimulating for the economy as it was in 2022. We are also monitoring the current normalization of the yield curve in the US, as the time of the inversion was often an indicator of an incipient recession. Read more about possible investment strategies during a recession here.
Interest rate sensitive sectors such as banks and insurance companies could underperform other sectors from both a momentum and sentiment perspective in light of likely upcoming rate cuts. From a geopolitical perspective, the potential risks from a possible escalation of the Middle East conflict do not appear to be adequately priced in. We remain just as vigilant here.
Marketing advertisement: All information published here is for your information only and does not constitute investment advice or any other recommendation. The statements contained in this document reflect the current assessment of DJE Kapital AG. These may change at any time without prior notice. All statements made have been made with care in accordance with the state of knowledge at the time of preparation. However, no guarantee and no liability can be assumed for the correctness and completeness.