• Klaus Meitinger

"Stock prices will continue to rise."

PW 04052021 Borsenglas

Although the quotations of most stock indices are close to their record levels, two thirds of the members of the Lerbach Competence Circle are betting on rising prices in the coming six months as well. They have good arguments for this.

"Actually," reflects Gottfried Urban, Urban and colleagues, "there is hardly anything to be said against equities at the moment. After all, the combination of ultra-loose monetary policy coupled with an economic boom and slightly higher inflation in the US and to some extent in Europe is almost an ideal situation." "Moreover, the flood of liquidity we are currently seeing is historically unparalleled.This is and will remain a key driver in the capital markets," Jörg Rahn, Wirtgen Invest, makes clear. "In my view, equities are quite simply without alternative in times of ongoing financial repression and negative real interest rates," adds investment expert Stefan Hollidt.

He says it has already become clear in recent months what it means when many market participants shift from savings accounts or bonds into equities. The fact that more capital has flowed into equity funds worldwide in the last five months alone than in the entire past twelve years has undoubtedly boosted prices. "Nevertheless, the money overhang is still huge. That's why there will only ever be brief setbacks in the stock market, which will be exploited by those who are not yet invested," Urban explains. In fact, that record inflow was just $576 billion. There is still almost 2.9 trillion euros in German savings accounts alone. And another nearly five trillion dollars is said to be invested in U.S. money market funds. "There are simply still many investors on the sidelines, worried about missing out on the rally," Joachim Meyer sums up.

He adds that the huge support from monetary and fiscal policy will inevitably mean that the economic environment will remain very positive over the next six months. "In the US alone, government support since August 2020 amounts to $5.3 trillion. If you now add the Fed's securities purchases and the planned infrastructure investments, we are at over ten trillion dollars," calculates Carsten Mumm, Donner Reuschel. That's equivalent to about half of the U.S. national product generated in 2020.

"China's economy is also humming, and from that, growth across Southeast Asia should also pick up," adds Stefan Ebner, Focus Asset Management. "Last but not least, we should not neglect the pent-up demand from the lockdowns that should unfold as the vaccination campaign progresses. That will unleash a real consumption boom," adds Alexander Ruis, SK Family Office.

"I therefore expect that we will see a very dynamic global recovery with above-average growth rates this year and next," concludes Mumm. Indeed, in early April, the International Monetary Fund raised its estimate for global growth this year to six percent - the highest since 1980.

"From an investor's point of view, what's very important is that we're only at the beginning of a long-lasting economic cycle in the process," Rahn says. "So we don't have to worry that the corporate earnings trend is going to break in the near future. Equities should therefore continue to perform positively for a very long time," adds Arne Sand, Sand & Schott.

The experts do not share the great concern of many investors that these prospects have long been reflected in the current quotations. "In my opinion, the dynamics of this upswing are still underestimated," says Robert Greil, Merck Finck, and concludes: "There are still very many positive surprises conceivable." "I could imagine that price increases are possible because of pent-up demand in consumption and that we see a productivity boost from digitalization. Both would further boost profits," Ruis says.

On balance, therefore, forecasts for corporate profits are still likely to be too low. "In our view, even further upward revisions to earnings per share are therefore likely," Greil opines. "Incidentally, this was also evident in the first-quarter 2021 reporting season. 86 percent of the companies in the S&P 500 beat analysts' expectations. I see no reason why this should not be similar in the future," adds Stefan Mayerhofer, Bayerische Vermögen.

Representatives of the half-full faction are also relaxed about the second risk - higher inflation and the accompanying higher interest rates. "Investors should not let themselves be put off by the recent rise in bond yields," says Karsten Tripp, HSBC: "Inflation is just a spectre that will soon be history again. A year ago, energy prices collapsed massively as a result of the lockdown. The annual rates of change now look correspondingly spectacular. Starting in June, or July at the latest, the rate of inflation in the U.S. should start to come back toward the normal level of two percent or below."

And that would also take fears of rate hikes or premature monetary tightening off the table. "After all, the Fed has made it clear that it will tolerate a temporary rise in inflation rates as long as full employment is not reached. And the ECB is arguing similarly," Arne Sand reminds us.

If interest rates do indeed remain low, he adds, it will continue to be true that equities are cheaply valued compared to bonds. "In my opinion, equity market players have still not adjusted to a sustained low interest rate environment," analyzes Maximilian Kunkel, UBS Germany, and calculates. "For example, if we assume our current year-end target of 4400 points for the S&P 500, the price-earnings ratio based on expected earnings for 2022 is 20.9. The earnings yield, the inverse P/E ratio, holds at 4.77. If, on the other hand, we set a yield of two percent for US government bonds with a ten-year maturity that we expect, the difference between the yields on the stock market and the bond market is 277 basis points. But on average over the past 35 years, it has been only 200 basis points. From that perspective, stocks are still relatively cheap."

The uptrend, experts say, is well-founded and remains fully intact. In the meantime, it has gripped the broad market, they said. "At the end of March 2020, less than ten percent of the stocks from the S&P 500 were still above their 200-day line," explains Alexander Prochnow-Ast from the Family Office of Volksbank Kraichgau. At that time, the stock market upswing was only attributable to a few stocks and stood on weak legs. "Currently, 96 percent of the stocks from the index are above their 200-day line. So the price rise is being driven by many stocks.That's another argument for investors to stay invested." ®

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// Full-on.

"Basically, I expect cyclical and value stocks to do well in the shorter term, IT and healthcare companies are likely to be long-term winners," Robert Greil opens the discussion. "Due to the shortage of chips, we are optimistic here for the semiconductor sector, for example," adds Mayerhofer, who also identifies structural growth opportunities in the healthcare sector. "There we see catch-up potential, simply because many treatments had to be postponed during the pandemic."

In the cyclical sector, Maximilian Kunkel has identified two exciting sectors: "Banks and energy stocks are attractively valued and benefit from the economic environment." Prochnow-Ast is paying particular attention to US banks. "Thanks to the progress made on the vaccination front there and the massive government aid, there are likely to be fewer loan defaults than expected.At the same time, the fact that the yield curve is steep, i.e. short maturities yield less than long ones, will have a positive effect on earnings.Banks can, after all, borrow money in the short term and then lend it out in the long term."

Stefan Ebner advises not to forget Europe: "The European sector structure is more cyclical than that in the US. The coming economic boom should therefore benefit Europe even more." In addition, European equities currently also have a valuation advantage over their American counterparts.

Asia is also among the favorites. "We have a young, growing and in many cases tech-savvy population there and the proximity to the growth engine China, which makes this region particularly exciting at the moment," explains Carsten Mumm. Karsten Tripp has a similar view: "For me, Asia, like technology, is a structural issue. Entering with a long-term perspective is particularly worthwhile after the recent price correction."

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