“Positive momentum on the markets could stay around for a while”
#1 Market & Macro
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It seems to be irrelevant that inflation rates prove to be stickier than expected, that leading
indicators suggest caution or that there are first signs of hopes pinned on the panacea of rate cuts not being fulfilled in the near future or not reaching as far as expected – the riskier market segments such as equities and corporate bonds seem to know only one direction, and this is higher and higher. -
Even the fact that sovereign bond yields have risen of late did not stop their upward trend. “One reason is, of course, that markets meanwhile assume that the U.S. economy will not slide into recession. Corporations find it much easier to live with high interest rates when the economy is booming. “We believe that this positive momentum on the markets will stay around for a while. Over a medium-term horizon, this price rally will, however, be contained by valuations,” Björn Jesch, Global CIO, states.
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“It is still too early to upgrade Asia,” Jesch adds. The crucial question on the state of the Chinese economy still remains without a clear answer. Numerous measures taken by the Chinese government to boost the economy should at least be supportive. The valuation discount versus global equities has also reached levels not seen for a long time.
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We must wait and see whether this will suffice to prop up the Chinese stock market, which has performed below average in the past three years. India, the favourite among all stock exchanges, has meanwhile reached very high valuations. Large caps seem to be more promising there than small- to mid-caps.
Topics driving capital markets
Economy: sound growth in the USA, weak growth in the Eurozone, China should stabilize
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The U.S. economy should grow by 1.8% in the current year. Our expectations for economic growth in the Eurozone are markedly lower at 0.7%.
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In China we expect headwinds from the badly battered real estate sector to fade. Growth should hover around 4.8% this year. Japan, the stock exchange favorite, will probably have to make do with a meagre growth of 0.5% this year.
Inflation: lower inflation rates in the current year
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The inflation rate in Europe has fallen to 2.6% in February. However, core inflation remains comparatively high at 3.1%. We expect inflation rates to come in at 2.5% at year-end; this would be less than half the figure of 2023 (5.5%).
—In the United States, inflation rates should also continue to fall but still remain clearly above the Fed target of 2 percent. At year-end, inflation should stand at 2.8%, after 4.1% in the past year.
Central banks: the U.S. Federal Reserve and the European Central Bank could start to cut rates in June
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We expect the first small rate cut by the U.S. Fed in June – by 25 basis points. We expect key interest rates to fall from currently 5.25 to 5.50% to 4.25 to 4.50% until March 2025.The E
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European Central Bank should also cut rates for the first time in June, also by 25 basis points. By March 2025 the key interest rate should reach 3% (currently 4%).
Risks: sticky inflation, Chinese real estate sector, geopolitical conflicts
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However, if inflation proves to be stickier than expected and wage pressure continues against the background of tight labor markets, central banks might be forced to raise interest rates instead of cutting them. This could drive the economy into recession.
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If the crisis-ridden real-estate market in China does not stabilize as expected, this could lead to further defaults and increase the pressure on the economy.
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Geoplitical risks continue to be high. Global supply chains could be massively disrupted in the Middle East, negatively impacting oil and gas supplies. Russia’s war on Ukraine will remain an enormous factor of uncertainty for longer.
However, if inflation proves to be stickier than expected and wage pressure continues against the background of tight labor markets, central banks might be forced to raise interest rates instead of cutting them. This could drive the economy into recession. If the crisis-ridden real-estate market in China does not stabilize as expected, this could lead to further defaults and increase the pressure on the economy. Geopolitical risks continue to be high. Global supply chains could be massively disrupted in the Middle East, negatively impacting oil and gas supplies. Russia’s war on Ukraine will remain an enormous factor of uncertainty for longer
#2 Equites
- “We currently see one of the strongest trend markets, I have ever experienced. The hype around artificial intelligence (AI) has further accelerated the pre-dominance of growth stocks already existing for a while,” Thomas Schüßler, Co-Head Global Equities, states. The top ten percent of the biggest stocks already account for roughly 75% of market capitalization on the U.S. stock market. Such a high concentration has only existed twice in the past, in the years of 1929 and 2000.
- The most successful investment style since the start of this year has been “momentum”. More and more investors seem to be willing to join in instead of opposing it. However, it must be assumed that, in the course of this year, markets will reset their focus on the ubiquitous risks, which are currently rather pushed aside.
- “In the United States, the budget deficit of eight percent is making a decisive contribution to the good performance of the U.S. economy,” Schüßler says. However, the refinancing constraints resulting from this deficit might become a problem at some point in the future. There is also a host of risks in the European Union. Keywords: higher financing needs for the defence sector and for the implementation of de-carbonization.
- Weaker growth in China, tormenting export-driven economies such as Germany or deflationary trends are further potential risks. Dividend strategies as pursued by Schüßler are not exactly supported by the current environment. With two-digit returns in the growth sector, as currently experienced, dividend returns are not seen as decisive aspects for the success of equity investments.
- Although there are currently market segments with historically cheaply valued stocks paying high dividends, investors currently hardly show any interest in these papers. Schüßler: “Perhaps they will be discovered again at some point of time. The question is when.” But you never know, this could also happen pretty soon. And even if this sounds like news from another world: tech stocks can also fall. And rate cuts, which are now boosting market sentiment, are not always good news for the markets, as history shows.
Equities USA
Probably only little upward potential after the latest price rally
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Equities Germany
New records – scope for further price gains seems to be contained
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Equities Europe
High Valuation discount versus U.S. equities
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Equities Emerging Markets
Still a question mark on China
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Euro corporate bonds remain promising
#3 Fixed Income
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“The appetite for bonds, particularly bonds with risk spreads versus Bunds, continues unabated. This is clearly expressed by still high net inflows,” Thomas Höfer, Head Investment Grade Credit EMEA, states. Risk markets are boosted by two factors.
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Firstly, by the assumption that the rate hike peak has been reached and that first rate cuts might come in early summer. Secondly, by the Assumtion that a recession might well be avoided even if the economy remains weak. Investment-grade euro corporate bonds have benefited from this assessment. Yield spreads versus sovereign bonds have fallen by roughly 40 basis points in the last five months, and prices have risen accordingly. “Our outlook for this asset class remains positive,” Höfer says.
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The current reporting season of corporations underpins the sound fundamental state of various sectors. However, there are some risks around for corporations in the sector of commercial special lending. Our outlook for high-yield bonds is somewhat more subdued. Yield spreads have already narrowed to such an extent in the sector of high-yield bonds that there remains no potential at all for the United States and only little potential for Europe. Markets are expected to stay volatile in the short run.
U.S. government bonds (10 years)
Yield curve should normalize
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German government bonds (10 years)
Short maturities more promising than longer maturities
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Emerging market sovereign bonds
Cautiously optimistic due to a favorable U.S. environment
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Credit
Investment Grade
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High Yield
Dollar continues to be in high demand
#4 Currencies
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Despite the latest price rally: gold price could continue to rise
#5 Alternative assets
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LegendThe strategic view by March 2025 The indicators signal whether DWS expects the asset class in question to develop upwards, sideways or downwards. They indicate both the short-term and the long-term expected earnings potential for investors. Source: DWS Investment GmbH; CIO Office, as of 15 March 2024 |
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