The economy is sluggish, but the stock market is buoyant. Corporate profits are not keeping up with the record hunt. – Meanwhile, investors are driven by hope for cheaper money.
The German stock market hasn’t been able to stop for weeks. The prospect of lower key interest rates from the European Central Bank is driving the leading index Dax from one record to the next. There is great hope that cheaper loans will ultimately stimulate the economy and consumption. Jens Ehrhardt from asset manager DJE Kapital is convinced: “The expected start of interest rate cuts undoubtedly gives a good outlook for this year.” Nevertheless, experts also urge caution. Companies still have to justify the advance praise from the stock market, especially since the German economy is still sluggish.
By the end of March, the DAX had risen to around 18,500 points. In the first quarter of this year alone there was a whopping increase of around ten percent. This is basically more than many investors who invest broadly in the stock market with funds hope for as an average return for one year.
Investors are hoping for a rate cut
The European Central Bank appears to be heading for its first easing in June. A similar picture emerges outside the Eurozone: the US Federal Reserve is currently expected to make its first interest rate cut in the middle of the year. Other larger central banks such as the Bank of England are also likely to soon dare to descend from the interest rate plateau. The Swiss central bank SNB has already moved ahead; it reduced its key interest rate last week.
The recent sharp fall in inflation allows the monetary authorities to loosen the monetary policy reins. In this respect, it is not surprising that the stock markets in the USA and Europe are constantly rising to new heights. Ultimately, as interest rates fall, stocks become more attractive compared to fixed-interest securities such as bonds.
Warning of high labor costs
But the warning voices are getting louder. There are fears that the recent price increases are too far ahead of economic reality. The US bank JPMorgan, for example, sees the rally on the stock markets only being supported to a small extent by the company’s profit development. The central banks are likely to make some key interest rate cuts in the second half of the year and thus support the stock markets, note the experts led by strategist Mislav Matejka. But “in order to justify current stock valuations, there must also be at least some increase in profits.”
Felix Hüfner, chief economist for Germany and European economist at UBS Investment Bank, is even more skeptical. He expects that the broad European stock index Stoxx Europe 600 could lose around ten percent of its value by the end of the year.
Inflation has now fallen significantly, but wage pressure is still relatively high in the common currency area, according to the expert. “Wages are an important cost factor for companies in the eurozone.” If demand is only moderate at the same time, this could put a strain on profit margins.
According to Hüfner, there is uncertainty in Germany as to the extent to which collective wage growth will weaken from its recent level of around 4.5 percent. Because of the sharp drop in inflation, there are fewer reasons for continued high wage growth. On the other hand, the labor market is still tight and there is hardly any short-time work. Therefore, “the workforce is in a good negotiating position due to the current skills shortage.”
The economy and the stock market are drifting apart
In this country, the deviation between the record hunt on the stock market and the current economic situation is particularly striking. Compared to other countries, the German economy is only slowly getting back on track. Leading economic research institutes have recently significantly reduced their growth expectations. They only expect growth of 0.1 percent this year.
But there are good reasons for the discrepancy between economic data and index development, says Benjardin Gärtner, head of equities at the fund company Union Investment: “Only a few companies are setting the tone for the leading German index in the current bull market.”
These included the Walldorf-based software group SAP and the other two index heavyweights Siemens and Airbus. SAP, for example, is pursuing the path towards the cloud very confidently and convincingly and the industrial group Siemens is providing solutions for many of the questions of the day. However, there is little to be seen of significant price gains across the board.
According to Gärtner, with the transformation of the economy towards climate-neutral production, the reform backlog in Germany and the energy crisis, there are a number of challenges that German companies would have to face.
The 40 companies listed in the Dax are at different stages of completing their homework. The expert sums up: “The fact that the German leading index had a strong start to the year does not mean that the problems have been overcome. But it shows that there are winners even in critical phases – not only in the Dax, but also.”
Source: Stern
