by Benjardin Grtner, guest author of Euro am Sonntag
Dhe capital market environment is characterized by great uncertainty. The diagnosis, however, is largely clear: we are at a turning point. As a result of the corona pandemic and the escalating geopolitical tensions, trends have intensified, trend breaks and new trends have started. This naturally leaves its mark on the stock markets. Where the journey is going and where new balances can be found is not yet entirely clear.
Concerns about growth and inflation are currently dominating. At the same time, there is uncertainty as to whether the central banks, which have decided to fight inflation by raising interest rates, are overshooting the target given the many existing risks to growth. However, our economists expect that inflation will soon begin to fall slightly, making it easier for central banks to achieve a “soft landing” without stalling the current economic cycle.
Therefore, apart from risks, the current market phase also offers opportunities – but patience and prudence are required. Earnings expectations have fallen, but continue to point to stable growth. Although the tensions in the supply chains continue to exist in some regions of the world, according to our experts, they are likely to gradually ease. However, if the supply of Russian natural gas is not completely stopped, not only the US economy but also the economy in Europe should continue to grow. Investors should keep a few points in mind for their investment strategy:
Growth stocks, i.e. growth stocks, have outperformed over the past decade because their valuation was driven by the fall in interest rates. Since growth companies generate a large part of their profits only in the distant future, rising interest rates have a particularly strong impact on their valuations. Companies that are likely to generate their profits primarily in the coming years, such as retail or energy companies, are less affected by rising interest rates. Against this background, the investment strategy coined by US investors Benjamin Graham and David Dodd, which relies on stocks with favorable fundamental valuations, regained its attractiveness. We expect that value stocks will be able to make up some ground compared to growth stocks in the future.
Both the S & P 500 Index and the DAX are favorably valued
However, the era of growth stocks is not fundamentally over; the focus is just shifting. Earnings momentum in the tech sector has peaked – this trend is currently being reinforced by consumer and investment decisions as well as increasing competitive pressure and more regulation. On the other hand, more and more industries are being digitalization and automation, such as the industrial or healthcare sectors. This is where new growth areas are emerging.
Quality scores: high-flying trend stocks have lost significant value in recent months. On the other hand, companies with strong global market positions, loyal customer relationships and good pricing power are attractive investments in a context of structurally elevated inflation. Many high-quality, innovative companies are able to pass price increases on to buyers of their products or services, thereby protecting their margins even in an environment of rising costs.
In some cases, large investors have been forced to reduce risks in recent months and have reduced their share portfolios. This has depressed the ratings. Measured by the S & P 500 Index, US standard stocks are currently valued at around 18 times earnings, the leading German index DAX 40 even with a price-earnings ratio (P/E) of 11. Both are rather low values in historical terms. With an active, fundamentally driven investment approach and a strict focus on valuation discipline, this should result in promising opportunities.
In view of the risks for the equities asset class and also the new opportunities, active selection and close monitoring of what is happening on the market is crucial in order to be able to intervene quickly if necessary. Investors should keep their return expectations low and be prepared for further increased volatility.
Benjardin Grtner
Head of Equities Portfolio Management at Union Investment
Grtner is a member of the Union Investment Committee, which formulates Union Investment’s capital market strategy on a monthly basis. Union Investment is the investment company of the Volks- und Raiffeisenbanken and, with assets currently under management of around EUR 370 billion, is one of the largest German asset managers for private and institutional investors.
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Image sources: Union Investment, peterschreiber.media / shutterstock.com
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