„Perhaps this is a sort of calm before the storm“
Mr. Hünseler, the ECB has just lowered its key interest rate. But will the Fed also lower its key interest rates this year?
This question is currently moving the financial markets. The economic decoupling of the two major economic areas, and thus also of monetary policy, is unusual. Inflation in the US is by no means declining steadily enough to justify a quick rate cut. At the same time, there are recurrent signs of a weakening economy in America. The likelihood is high that the Fed will lower its key interest rates this year.
But it’s an election year in America.
The Fed will have to consider this additional area of tension. It certainly doesn’t want to be accused of influencing the election with a rate move. Therefore, there must be good reasons for any action.
And will the ECB continue to lower its key interest rate?
The ECB will proceed on a fact oriented basis, and take into consideration inflation data in the Eurozone. We do not expect another rate cut in July. However, we anticipate that the ECB will lower its key interest rate twice more this year. The trend reversal in monetary policy has begun. Now it’s slowly and cautiously moving downward again.
What does this mean for asset allocation?
There could be a trend change here as well. Recently, large caps have been in demand. With lower interest rates and a subsequent economic recovery, small and mid caps, or second and third-tier stocks, will become more interesting again. Dividend-paying stocks could also benefit. In the past, such stocks were sought as a kind of bond substitute because, in a low-interest environment, stable dividends are a real alternative. Defensive stocks like utilities could also be in demand again.
Does this also apply to insurance stocks?
Caution is advisable with insurance stocks, because falling interest rates are not necessarily positive for them. Some insurers like to stand out with high dividend payouts. It is important to weigh which business models offer the necessary stability in operating earnings, so that no payouts from the company's assets are required.
Will auto stocks become more attractive again?
Autos are facing tough times, which is why stocks are cheaply valued. But at the same time, they account for a large portion of the dividends in the German stock index. A significant economic recovery would definitely benefit the auto sector. However, it needs to become more stable first. Cyclicals are less attractive to us at the moment. We are currently positioned more defensively, and autos are additionally burdened by special factors such as renewed protectionism.
The first half of the year, which was very good for stocks, is soon coming to an end. How should investors position themselves for the second half?
The first half was surprisingly positive for stocks – at least at first glance. However much of the notable index gains can be attributed to a few stocks. We are exiting a market trend marked by high inflation and corresponding countermeasures. The new trend has yet to develop. The uncertainty is greater than the volatility indicators suggest. Perhaps this is a sort of calm before the storm. Regardless of which risk premiums you look at, whether from stocks or credit, they are too low. It’s likely that it won’t stay this way, and the market will have to find its footing again. Therefore, we are currently positioned somewhat more defensively.
What does this mean for sector or country allocation?
This means that we are particularly avoiding sectors that are heavily tied to the economic cycle. Airlines, for example, are not necessarily advisable in such an environment. These companies feel the impact immediately when consumers start becoming more selective with their spending or saving.
Should investors diversify more globally?
Yes, definitely. India has become more interesting. China has recovered significantly from its low point. The country continues to try to get the real estate crisis under control. It remains to be seen if this will succeed, but the supportive measures are sending positive signals. Against this backdrop, it could be interesting to increase exposure to Asia again.
And Europe?
In the US, stock prices have already anticipated a lot of profit growth. Therefore, from our perspective, Europe is more favorable than the US today.
Will we see a correction after the stock market boom, or bigger fluctuations?
Price fluctuations could hardly be lower. It’s relatively unlikely that this very calm environment will persist. There are plenty of potential disruptors, such as geopolitical tensions, which have potential as so-called exogenous shocks. The risk of an unintended escalation has increased significantly. The nature of such events is that they are hardly predictable, and investors cannot prepare well for them.
What happens if Trump is elected US President?
In Europe, a possible election of Trump is met with concern. This is understandable from a European perspective, as erratic foreign policy and the isolation of this large economic area from other countries force Europe to take on significantly more responsibility and unity. But Wall Street does not seem troubled by the election. Even in 2017, after Trump’s surprising election as President, there was no crash but rather a positive trend in the markets. Medium- and long-term consequences may differ, but that does not move the financial markets today.
