Market Comment

Market Comment

The Market Comment is published monthly and sheds light on current topics from the investor's point of view.

Market Comment

US and Europe – significant differences persist

Although European equities have made up some ground on their US counterparts this year, they lag well behind US equity markets in a long-term comparison. There are a number of key reasons why Eurozone stocks in particular have underperformed American equities over the longer term. And even if some of these factors change, we are still not expecting the kind of dramatic turnaround that would threaten the long-term superiority of US stock market performance. Below we highlight the important differences between the US and Europe – from both an economic and an equity market perspective. 
 

Market Comment

The “Japanization” of Europe?

Quantitative monetary easing, falling interest rates, low valuations of banking stocks and “financial repression” – all these developments now evident in Europe are familiar to us from many years ago in Japan. The conclusion is that cash is becoming even less attractive, and that without diversified risks it is unlikely that positive returns will be possible. 

Market Comment

20 years on from 1999 – a comparison of economic cycles

The US economic cycle has reached a ripe old age in the last few weeks. To be precise, it has become the oldest, i.e. the longest, in the history of economics. This has seen it surpass the cycle of the 1990s. Below we highlight some of the parallels and differences compared to the latter cycle. The 1990s cycle is remembered for ending with an increase in the valuations of global equities thanks to interest rate cuts. However, these were ultimately not enough to prevent an economic downturn, hence the subsequent correction.

Market Comment

Geopolitics, (cheaper) money and gold

A number of traditional “safe haven” investments such as gold have racked up price gains in recent weeks. US Treasuries, the Japanese yen and the Swiss franc have likewise been in vogue with investors against a backdrop of increasing uncertainties. In our view, broad diversification across all asset classes makes sense given the various unresolved geopolitical rivalries and tensions. A dialogue is a fine thing, but it is not the same as a deal – the geopolitical rivalry between the US and China remains very much in place after the G20 summit in Osaka, as do the simmering tensions between Iran and the US.

Market Comment

Geopolitics, (cheaper) money and gold

A number of traditional “safe haven” investments such as gold have racked up price gains in recent weeks. US Treasuries, the Japanese yen and the Swiss franc have likewise been in vogue with investors against a backdrop of increasing uncertainties. In our view, broad diversification across all asset classes makes sense given the various unresolved geopolitical rivalries and tensions. A dialogue is a fine thing, but it is not the same as a deal – the geopolitical rivalry between the US and China remains very much in place after the G20 summit in Osaka, as do the simmering tensions between Iran and the US.

Market Comment

Equities or bonds – which asset class is right this time?

Despite a rise in volatility, equity markets remain much higher than at the beginning of 2019. On the other hand, bond yields have declined since the start of the year all around the world. As a general rule, these two economic indicators develop in parallel against a backdrop of an expanding economy. The fact that they are not doing so raises the question of which asset class is right – equities or bonds? 

Market Comment

Equity markets hit by intensification of trade dispute

As we recently explained, the combination of low volatility (anticipating a “perfect world”) and expensive stock market valuations at the end of April was not a realistic reflection of the economic fundamentals.  These pointed to – and continue to point to – a global economy of doubtful strength, with weaknesses particularly apparent in the emerging markets and Europe. Moreover, the markets had already factored in a rosy, tension-releasing trade deal between the US and China. Yet anyone who has read Trump’s book “The Art of the Deal” can hardly have been surprised by his announcement of another ramping-up of tariffs against China, from 10% to 25%. A correction in equity markets, which in some cases were at record highs (such as the US) or had recorded significant rises since the fourth quarter of 2018 (such as the emerging markets, particularly China, but also cyclical sectors) comes as no surprise to us. We had prepared for such a scenario by scaling down our equity weighting in April, specifically our exposure to the emerging markets.

Market Comment

MinVol Equities for less quiet markets

The sharp decline in volatility since the start of the year once again suggests a certain insouciance on the part of the financial markets, as expected volatility also lies far below historical averages. The above-average rise in equity markets in 2019 to date is another sign of pronounced market optimism – despite the fact that US yield curves are increasingly becoming inverted. While this does not mean that all equity markets are bound to decline imminently, a higher weighting of less volatile stocks (so-called MinVol equities) at the expense of those with higher volatility only makes sense now. A sharp rise in equity market volatility over the next few months would not surprise us, as the economic slowdown does not yet show any signs of being halted. The US yield curve inversion only strengthens us in that view.

Market Comment

Potential repercussions of a Sino-US trade agreement

The financial markets are increasingly anticipating at least a partial solution to the trade conflict between the US and China. But the devil lies in the detail. In the event of a positive resolution to the dispute, those commodities and equities that are more heavily dependent on China or on Asian supply chains could benefit, while the US dollar could weaken somewhat. The potential for disappointment in the event of the trade conflict continuing should not be underestimated, however.

Market Comment

Economic slowdown speaks for defensive stocks with growth potential

The US central bank (Fed) has made a change in its monetary policy: it has decided to take greater account of the development of the global economy and financial markets. The same is also true of the European Central Bank (ECB), which is hardly likely to be able to push through an interest rate increase this year. When central banks start to align policy with the likelihood of economic slowdown, investors should prepare themselves for precisely such a scenario. In phases of global economic weakness, defensive equities with growth potential that enjoy relatively more stable dividend and income development – as well as exhibiting lower volatility than other equities – become increasingly interesting.

Market Comment

Less liquidity = more volatility

In the first half of December we warned of an imminent rise in market volatility. Volatility can increase for different reasons. On the one hand there are structural reasons: less liquidity in the markets, less monetary liquidity, geopolitical risks. On the other there are also cyclical factors like the economic slowdown. Investors who like less volatility should not dismiss equities altogether as valuations have now fallen. Instead they can adopt a more defensive approach through the greater use of equities that are less market-sensitive or by giving a greater weighting to so-called safe havens like US government bonds and gold. 

Market Comment

Limits of globalization

Given the sharp rise in volatility in the financial markets in 2018, an obvious question arises: What is the underlying reason for the increase in uncertainty that is driving this phenomenon? Could globalization finally be coming up against its limits?

Market Comment

Financial markets remain political

Given all the political uncertainties in the world right now, it is easy to become pessimistic – perhaps too easy. In fact, the fundamentals suggest the market decline in October should be categorized as a classic autumn correction, not a recession-induced bear market. But geopolitical developments, above all the US-China conflict over trade but also other unresolved issues, can be expected to keep global financial market volatility (on both sides) higher than normal.

Market Comment

Trump's trade war and the global economy

One politician is dominating the financial markets this year like no other: US President Trump – and his trade war with major exporting nations. In order to deliver on his electoral promise to "make America great again" and improve the chances of the Republican Party emerging victorious from the midterm congressional elections on November 6, Donald Trump has gone the extra mile – but he is also risking a great deal. Above all, his decision to increase the volume of goods with punitive tariffs imposed on China by a factor of five is responsible for the difference between the performance of US equities (upwards) and that of the emerging markets (downwards), as well as the disappointing performance of European equities. With these initiatives, Trump has extended the economic growth difference advantage enjoyed by the US. However, with escalating the trade conflict he is courting the risk of the global economy taking a hit in 2019. This could be to the detriment of US interests, too.

Market Comment

Ten years after Lehman

Ten years after the collapse of Lehman Brothers, the US has global leadership on a scale not seen since President Reagan. Even if Trump is obviously not Reagan, he has provided significant assistance to US markets and the US economy – though not to other regions. Trump's surprising announcement that he is considering increasing the volume of punitive Chinese tariffs by a factor of five has pushed down emerging-market and European shares, but has lent further support to US equities – a segment in which we have long held an overweight stance. In fundamental terms, the US economy has improved dramatically since September 2008. Unemployment in the US is the lowest in 50 years, whereas in Europe, for example Italy, the unemployment is still higher than it was in the US ten years ago.

Market Comment

Focus on US equities

We would like to elaborate on our focus on US equities and explain why we remain overweight in this segment compared to global equities. Even if it loses some momentum over the next few months, the US economy continues to exhibit above-average growth. US corporate earnings have once again exceeded the market's high expectations for the second quarter, with more than 80% of companies surprising on the upside. Valuation methods do not suggest US equities are overly expensive, particularly not in relation to US bonds. The American stock market can therefore cope with higher interest rates – as long as these are accompanied by solid economic growth, as this would have the effect of boosting corporate earnings. Our US equities module offers promising performance and a diversified way of gaining exposure to the world’s leading equity market, which also boasts the strongest earnings growth of any region.

Market Comment

Commodities and inflation in upward trend

In late phases of the global economic cycle, production capacity is generally heavily utilized, which is why more resources are required – such as labour, but also commodities. Historically, this has often led to higher rates of inflation due to higher commodity prices. Higher import prices against a backdrop of the escalating trade conflict and US sanctions against Iran could have the effect of exacerbating increases in commodity price inflation. Investors can counter rising inflation and commodity prices with a commodities focus module.

Market Comment

No Italian Summer?

Italy finally has a new government. But the new coalition's policy plans put it on a path to confrontation with the EU, as Italy feels it has been left in the lurch. The realization of these electoral promises could trigger a massive increase in Italy's budget deficit, as well as turbulence in the eurozone. European equities now come with higher risks attached.

Market Comment

What the US–China trade dispute is all about

The trade dispute between the US and China should not be underestimated. However, a bit like the approach adopted by Ronald Reagan against Japan in the 1980s, the negotiation tactics adopted by President Trump could lead to a compromise that brings relief to the markets. The positions adopted by both sides, US and China, are understandable. Ultimately, what is at stake here is nothing less than global dominance in the area of geopolitically crucial technologies.

Market Comment

Geopolitics: Bonds and gold can help in temporary equity turbulences

The financial markets are under the spell of new geopolitical tensions. These have been triggered by a more hard-line policy on the part of the US re- acting to practices of Russia and China that it is no longer prepared to tolerate. In the medium term, equity markets are driven more by earnings and economic growth than by political events. In temporary phases of geopolitical uncertainty, bonds have historically performed well, while commodities such as gold have typically acted as a safe haven. Thus, bond and commodity modules are key components to hold as part of a complete portfolio.

Market Comment

Five Factors for Emerging Markets

Like all equity investments, emerging market equities come with risks attached – such as higher short-term volatility – but five factors are currently boosting the longer-term appeal of this segment of the equity market. These are as follows: cheaper valuations than the world equity index, historically undervalued currencies, higher weighting of important technology stocks, strong economic growth and rising commodity prices. They are particularly interesting as long as the US dollar remains on a downward trajectory.

Market Comment

Turbulent times – keep calm

The first few weeks of the New Year began strongly for the markets – too strongly, as it turned out. After global equity markets performed unusually well from a historical perspective in January, recording a rise of around 5%, a major consolidation (i.e. correction) has now taken place. However, this latter development should be viewed against a backdrop of long-term market strength in which no real market consolidation took place at all.

Market Comment

Optimism yes, euphoria no

Will there be a year-end rally in in equity markets in 2017?  But the importance of what actually happens in the remaining weeks of the year should not be over-exaggerated. Above all, investors should keep a wider perspective. And that picture gives us reasons to be confident.

Market Comment

Commodity prices at the crossroads

What are the medium-term perspectives for commodities? We give an overview of the developments of the past decades and the long-term influence factors which offer a positive outlook for commodities.

Market Comment

The outlook for Europe

How does the situation in Europe look? Before the background of Brexit and a number of tensions within the EU, its macro-economic situation has improved strongly. We give an overview.

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