Investor skepticism grew as the media reported a pause in negotiations Debt dispute in the United States reported. The most important US indices also slipped into the red.
There is a dispute about raising the debt ceiling in the USA currently $31.4 trillion. According to the Treasury Department, if no agreement is reached, the United States could face insolvency from June, which would shake the global financial system.
Investors had just taken a somewhat more positive view of shares and bought more. For months, many investors had been chasing the rising prices. “Investors felt compelled to get back on board,” comments Marcus Poppe, co-head of European equities at DWS and fund manager, on the recent price development. “Sometimes you just want to see the glass half full instead of half empty.”
In the coming weeks, investors will weigh up the opportunities and risks for five topics – and move prices accordingly. An overview:
company numbers
The chance: Poppe sees the relief that fears of an economic downturn in Europa didn’t prove true. In the course of falling energy prices, company costs have also fallen again. The price of crude oil has fallen by around a third in the past twelve months, and the price of gas by almost two thirds.
As a result, company results in the first quarter turned out better than expected. Analysts’ earnings forecasts for European stocks were exceeded by eleven percent, and earnings growth averaged almost six percent.
The industrial and automotive sectors in particular have developed much better than expected, says Poppe from DWS. The fear that consumption and, as a result, profits could collapse has not come true. Although the mood is not yet good, the latest wage increases have curbed real wage losses.
Die Dax-Companies could post a slightly positive net profit trend this year. For that to happen, the chemical industry would have to recover and the auto industry would have to be able to continue its “profit party” through price increases, the strategists say.
According to Ann-Katrin Petersen, capital market strategist at the US fund house Blackrock, courageous and accelerated investments in energy security and defense as well as a green transformation of the economy could also ensure share price increases.
The risks: The view ahead for the companies is much murkier. Some of the incoming orders have already fallen, says Poppe. For him, “the general weather situation is not getting better, but rather worse”. The fund manager does not expect corporate profits in Europe to increase on average over the next twelve months.
Petersen also remains cautious: Inflationary pressures could be more persistent than expected given tight labor markets and rising wages and the European Central Bank (ECB) She fears that this will induce an even sharper interest rate hike.
The ECB could soon raise interest rates even further.
(Foto: IMAGO/Political-Moments)
A stronger tightening of credit conditions than expected is also a risk in Europe. And the uncertainty about the energy supply will not be over before next winter, she says. Christoph Witzke, senior strategist at the savings bank fund subsidiary Deka Investment, warns that it is still not clear whether a recession in Europe has been averted.
Stock Valuation
The chance: Poppe from DWS sees positively that the valuations of shares in Europe are on average significantly lower than those in the USA. The Dax and the broad European Stoxx 600 index are at historically low levels with price-earnings ratios of less than eleven and a good twelve, well below the leading US stock market barometers S&P 500 and Nasdaq at around 17 and 23. Even after the upswing this year, the European stock markets are not overpriced, neither in an international nor in a historical comparison, agrees strategist Petersen.
The risks: Stock valuations could also be deceptive, strategists warn. For the company profits as an element of the valuation to develop as expected, the economic environment would have to be right – and there are doubts about that. Blackrock’s Petersen also warns that investors should keep an eye on risks to corporate earnings and economic growth.
capital market rates
The chance: On the stock markets, it is now expected that interest rates will not rise much further. The first rate cuts are expected in 2024. The main reason is the declining inflation rates in both the USA and Europe. According to Witzke von der Deka, share prices are therefore more likely to be supported by interest rates. The inflation rates in the euro zone lagged behind those in the USA. But there are already individual countries like Spain where producer prices are already falling.
The risks: Should the Economy stronger than expected, as further rising interest rates could put a greater strain on consumption and investments – and thus also on company profits, says Poppe. This applies to the USA as well as to Europe. Witzke is worried about the consequences of the rise in interest rates that we are behind: it could put a strain on companies’ refinancing and lead to further significant price setbacks.
As for the US Federal Reserve, rate cut hopes in the market are likely to be dashed given persistent underlying inflationary pressures, says Petersen. The US central bankers would probably have to maintain their restrictive stance for a longer period of time.
US monetary policy is currently difficult to assess. Most recently there were voices from the Fedwhich indicate that interest rates will continue to rise. FedCEO Jerome Powell countered: In his opinion, the aftermath of the recent US bank quake would make the fight against inflation easier. Because of tighter lending conditions, interest rates might not need to rise as much as they would otherwise, he said at a Washington forum.
At 4.9 percent, inflation is still a long way from the Fed’s target. This also applies to Europe. The European Central Bank (ECB) has raised interest rates faster than ever in its history, but many strategists like Petersen expect one or two more steps. And in their opinion, these have not yet been fully included in share prices.
USA
The chance: A political agreement in the debt dispute in the USA, which has always been the case in such cases in the past, should very quickly help to ease the tension on the markets. US President Joe Biden US President Joe Biden put pressure on the Republican opponents in Congress over the weekend that defaulting on government payments was not an option.
The risks: However, if the current dispute about raising the US debt ceiling is not resolved, this is currently one of the greatest risks for the development of the stock markets. The cost of hedging against a default in the world‘s largest economy over the next twelve months – measured in terms of traded credit default swaps (CDS) – has risen noticeably. They are currently even at a higher level than during the global financial crisis of 2008/2009. Their level is also higher than in 2011 and 2013, when concerns about a default were also circulating.
In addition, the risk of a deeper than anticipated recession in the USA looms large, which would also have a severe impact on the stock markets.
China
The chance: Inflation in China has almost come to a standstill despite the economic recovery. This gives the Chinese central bank leeway to support the economy. That, in turn, could boost stock prices. Investors are particularly hoping for positive economic development in the second half of the year.
The risks: However, the latest economic signals from China are weaker than hoped, says Poppe. Although the start of the year was initially good, the upswing in the Chinese economy subsequently faltered. The manufacturing sector in particular is not progressing, says Tommy Wu, an analyst at the Commerzbank. The background is the shaken confidence of companies and consumers in economic policy. This slows down the recovery of the labor market and weighs on consumption and thus also the service sector. The strategists fear that the weakening real estate market could also slow down the economic recovery.
Skepticism prevails
The bottom line is that nobody is currently ruling out another significant correction on the stock markets of up to twenty percent. However, something unforeseen must happen for this to happen, says Poppe.
Important economic indicators in Europe as well as in the USA could give new indications as early as next week. Strategists are more likely to see business and consumer sentiment deteriorating.
With a view to the overall situation, the experts, like many investors, remain rather cautious: “It is not the time to become too optimistic,” sums up the DWS fund manager. The strategists also name the uncertainty about the further development of the Ukraine war as a stress factor.
In the longer term, however, strategists see opportunities for equities. In the medium term, stock prices could climb ten to fifteen percent again, says Poppe. After the double-digit correction in 2022, Witzke von der Deka believes that further price increases are possible in the next twelve months.
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