The long overdue correction in equities has started, but how long it will last remains to be seen, according to Stefan Kreuzkamp, chief investment officer and head of investment division at DWS. “The overall environment remains positive, with low interest rates and good economic and earnings growth,” he said.
Despite a very strong second quarter reporting season, analysts have again raised their earnings estimates for the third quarter. “But things could get more difficult in the fourth quarter as numerous companies have issued a cautious outlook for the end of the year,” Kreuzkamp said.
He warned that the increase in the cost of materials, as well as labour shortages, are no longer leaving companies unscathed, and they must now decide whether to try to preserve their margins through higher selling prices or to maintain sales volumes by keeping prices the same.
Consumers’ propensity to spend could also dim as energy prices increase, wage subsidies stop, and even the temporary end to capital market gains could make themselves felt in their wallets.
“We are maintaining our relatively balanced positioning of high-margin, high-growth technology stocks on the one hand and cyclical quality stocks on the other,” said Kreuzkamp.
In the coming 12 months, equities and real estate remain favourites, though the potential returns are only moderate, according to DWS’s latest investment outlook.
Global equity markets will continue to be driven by fiscal and monetary support, with total returns to average around 5% over the next 12 months.
A good chance for a “second cyclical wave” of economic recovery in the second half of 2021 given the forecasts of solid economic growth, progress with vaccinations and the likely easing of supply-chain issues.
Regionally, this would benefit Europe and Japan. But in other regards both regions currently lack a clear catalyst that would narrow their increased discount to the U.S. DWS recommends overweighting information technology and selected cyclical sub-sectors, while underweighting the defensive side of the market.
China’s shadow over emerging markets
DWS continues to favour Asia, but the ongoing regulatory push in China is likely to keep prices volatile for a few more months.
The asset manager is cautious on the emerging markets in the short term because of China. Given the regulatory initiatives could drag on into the autumn of 2022 and individual sectors or companies could again be surprisingly targeted by the authorities. The markets could remain volatile as a result.
The financial difficulties of China’s second-largest real estate developer are leaving both customers and anxious investors wondering about the extent to which the government will provide a cushion – and therefore prevent a chain reaction, Kreuzkamp explained.
An increasing number of strategists are now cutting their China GDP growth forecasts for 2021 and 2022. Adding to the nervousness is the energy shortage (partly instigated by state interventions), which has led to the closure of some factories.
In the long term, however, the regulations and reforms that are being applied could benefit the economy and thus the market as a whole – provided not too much favouritism is shown towards quasi-governmental companies (SOEs) over private companies, said Kreuzkamp.
