After recent stock market records, the question arises: what will happen in the coming months? The economy is not providing a tailwind for the time being, and the fantasy of interest rate cuts seems to have run its course, according to some European fund managers and asset allocators.
“In view of the deteriorating macroeconomic outlook, stock selection increasingly depends on the micro level”, says Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM.
Well-positioned companies with solid figures and a defensive business model are attractive, Gerlinger says.
A look at the global economy gives no cause for optimism in Gerlinger’s view. The weak growth of the major economies is continuing, with the US economy still the most stable among the weak ones. The latest economic growth figures were strong however.
“Nevertheless, a recession in the US is still possible if the effect of high interest rates is delayed and more pronounced than expected”, warns Gerlinger. The slight signs of recovery in the Eurozone industry at the end of the third quarter should not be overestimated either. The German economy is in particularly bad shape, “which, interestingly, is currently being completely ignored by the DAX”, says Gerlinger.
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Where is global inflation headed in 2024?
Inflation is on the retreat, and the central banks’ target values are once again within reach. However, this is only a reflection of the weakened economy. There is also increased political risk: in the super election year of 2024, the populations of countries that account for three-quarters of global economic output will be called to the polls.
Equities have recently benefited from hopes of interest rate cuts, and a Fed rally began in the US, followed by Europe. For the coming months, however, concerns about profit margins are growing in the United States in view of shrinking scope for price increases, higher interest rates, and foreseeable weakness in consumption.
“As a result, market share, market positioning, and strong cash flow are likely to play an even greater role for companies in the future than they have in the past”, explains Gerlinger. “The ‘strong brands’ criteria, therefore, speak more in favour of large caps and growth.”
Small caps are not necessarily the first choice in the current environment but could experience a rebound in the event of a sharp fall in interest rates.
On this side of the Atlantic, too, profit expectations for 2024 are likely to become more modest sooner or later.
“Falling margins are likely to be the biggest problem for the very cyclical European industry in 2024”, says Gerlinger.
Keep an eye on the Chinese economy
The strong dependence on the Chinese sales market is an additional burden on Europe – but in the event of a significant recovery in China, export-oriented European equities would benefit. “Overall, the weak macro data speaks in favour of resilient, defensive business models”, says Gerlinger.
In turn, growth stocks, particularly US technology stocks, could benefit from a turnaround in interest rates. The rally in the AI sector could continue.
According to Gerlinger, however, the situation in Japan is somewhat different. The stock market recently reached a 29-year high. Companies are benefiting from a stronger domestic economy and a weak yen, which is supporting exports.
“Japanese equities are attractively valued, and the earnings trend remains positive,” he said.
Inflation has picked up, but the government in Tokyo is planning to tackle real wage losses with tax cuts. To this end, an economic stimulus package worth the equivalent of 100 billion euros was passed at the end of November. “Japanese equities”, concludes Gerlinger, “are particularly interesting in a global comparison.”
