Fiscal and monetary support – and, therefore, economic growth – are likely to peak this year, according to the German asset manager.
“[Therefore] we do not think there will be much left to gain at the index level for equities,” said Stefan Kreuzkamp, chief investment officer at DWS. “We think there will be themes that perform better than others.”
The next couple of months will be telling, following the impressive rally in most of the world’s major stock indices.
“We think the markets will have to jump some difficult hurdles in the summer,” said Kreuzkamp.
The outlook for economic growth, for example, is declining in the major economies. A peak is expected in the US in the second quarter and in Europe in the third quarter. In China, it already happened in the first quarter.
While DWS has upgraded some of its growth figures for the year as a whole – such as for the global economy to grow by 5.8% this year, compared with 5.3% previously – its forecast for emerging markets have been reduced slightly. Yet at 6.2% they, and particularly Asia, remain one of the most important sources of global growth.
Backing Asia and sub-sectors
This is reflected in the firm’s outlook for equities. Regionally, Asia’s emerging markets remain its favourite, even though these nations had a tough start to the year.
The optimism is based on expected high earnings growth of around 40% this year, as well as on a 35% discount to US equities, solid corporate balance sheets and unabated consumer appetite.
“[This] keeps us keen on this region, especially as its stock markets are home to a disproportionately large number of technology companies,” Kreuzkamp explained.
In terms of other opportunities, DWS says investors should focus on technology, European small and mid-cap names, and individual cyclical sub-sectors such as cars and mining stocks.
“Given the rise in inflation, quality companies with high pricing power look the most attractive, while the shares of many companies that suffered particularly early in the pandemic and were highly sought after during the reopening rally are quite expensive in our view,” added Kreuzkamp.
Diversifying income sources
The firm has a more cautious outlook for fixed income; it expects the bond markets to become increasingly nervous as the US Federal Reserve and European Central Bank elaborate their plans to tighten monetary policy. “Little return is expected to be made on government bonds from developed markets, if these returns are positive at all,” said Kreuzkamp.
As a result, DWS is backing Asian bonds, given the region’s economic upswing coming on the back of strong corporate balance sheets.
There is also a compelling reason to allocate to specific alternatives such as logistic properties close to city centres, or residential properties in the surrounding areas of sought-after metropolises, added Kreuzkamp.
Infrastructure projects are another investment segment that combines stable cash flows with potential compensation for inflation. “They should also benefit from the numerous projects being undertaken by governments,” he explained.