America and Asia more attractive than Germany and Europe
The United States and Asia currently offer more attractive opportunities for investors than Germany and Europe. This is mainly due to the uncertainty about the future development of energy prices and the resulting burden on the German and European economy. European equities and German government bonds should remain in a difficult environment. Corporate bonds offer selected opportunities with medium maturity.
The second half of August was difficult for the stock markets. This was mainly due to the energy crisis and the intensification of central bank policy, which prioritized the fight against inflation over growth and the labor market. We expect September to be a difficult month for the stock markets as well, especially for European equities and German government bonds.
Defensive allocation with a consistently high cash ratio
Historically too, September is often not good for the stock markets, especially in the second half. We will therefore continue to be on the defensive and not increase our overall investment ratio. From our point of view, the American market remains more attractive than Germany and Europe because it offers a better risk/return ratio. The problem of energy costs will continue to plague Germany and Europe, and the political responses still seem insufficient to us. German companies will be little relieved and will lack the necessary planning protections. Apart from the United States, we are a little more optimistic for Asia, at least if we consider the evolution of the money supply there. The city-state of Singapore, in particular, may offer opportunities. On the bond side, we continue to believe caution is warranted on German and European government bonds.
• Focus on companies with strong pricing power
• German and European government bonds remain unattractive
• Some still promising corporate bonds
We have reduced the proportion of equities in our fund portfolio at present. On the equity side, we still think it makes sense to focus on high quality companies with high pricing power as these can deliver strong earnings even in low growth environments and therefore better on the long term. Investment options may be offered. , In the context of fixed income, we find German government bonds particularly unattractive. This is explained by the worsening of the energy crisis, the resulting competitive disadvantage for German companies and the persistence of high inflation. Therefore, we consider the yield on German bonds to be very low. On the other hand, some corporate bonds continue to offer opportunities. Of particular interest are issues that currently offer yields of more than five percent with tenors of five to six years.
• Attractive American and Asian regions such as Singapore
• Germany and Europe rated favorably, but with risks
• China remains difficult
We believe the US market is more attractive than Germany and Europe as we believe it offers a better risk/reward ratio. Energy prices will continue to be weighed by Germany and Europe, especially since we do not consider the reactions of politicians to be adequate. From our perspective, the German and European stock markets are valued favourably, but the continued growth in energy prices poses major economic and location risks. China also remains very difficult from our point of view. First, we consider the trend towards greater nationalization – particularly among private property developers – to be of concern. The geopolitical risks posed by the escalating conflict around Taiwan make matters even more difficult. By contrast, both monetary growth and additional liquidity are improving in China. The evolution of the money supply in Asia is generally a little better again; Besides China, there is also positive additional liquidity in Japan. In Asia, we think Singapore is attractive: Singapore’s stock market is cheap and has shown relative strength since the start of 2022. Singapore is important to both the US and China as a trading hub. At a sector level, we continue to view the energy sector as promising: the sector is still cheap and has high free cash flow. Since energy supply cannot be increased in the short term, energy prices must remain high in the long term.
• The euro continues to be charged
• Nice Norwegian krone or Swiss franc
The euro should remain weighed down by growth in Europe and especially in Germany, as well as by the problem of energy prices. On the other hand, within Europe, we see more potential in currencies such as the Swiss franc or the Norwegian krone.
The author Stephen Brentner is Head of Research and Portfolio Management at DJE Capital AG.