Following the election of Donald Trump, it was as if an imaginary switch had been flipped on the stock markets that put U.S. indices in a marked ‘everything is going to be alright’ mode. The European stock markets have meanwhile also been swept up by this wave.
We expect positive sentiment to continue in the equity market until spring 2017. Investors, de facto, will have no other choice in 2017 than to return to the equity markets in order to enhance the target return on mixed portfolios. Bonds and property markets are overheated and commodity investments do not offer a genuine alternative. The starting point for stock markets in 2017 is promising: the economic outlook is stable, recovery in the emerging markets is accelerating and low interest rates provide companies with attractive sources of financing. The strongly export-oriented German stocks are benefiting from the weak euro. Increased calls for a revival of classic government demand à la Trump represent a joker which could still come into play.
Low capital market yields suggest that a large share of surplus liquidity in the bond market is continuously being invested in shares which have remained an attractive ‘reservoir’. Despite the recent rally, they continue to score highly in view of the relatively high dividends they deliver. The share of profits which is not distributed to shareholders in the form of dividends continues to work on behalf of shareholders if companies succeed in reinvesting profitably in their own business. In addition, investing in companies provides partial protection against inflation, because price increases can often be passed on. These aspects give shares a considerable edge in the long term over bonds which are currently providing weak yields.
If the share price trend is above average in the first trading days of January 2017, many investors are likely to jump on the bandwagon. This could further fuel share prices.
However, past experience tells us that politically induced upturns in the equity market are rarely sustained. The economic consequences of the plans outlined by the new U.S. Administration are not expected to be felt until 2018 at the earliest. The current rally, which is driven by hope, may end in spring 2017 once the general positive sentiment surrounding Donald Trump’s inauguration starts to settle and U.S. politics return to the daily routine.
Until then, the recommendation is to participate in the current upward trend on the stock markets. We will therefore increase the share quota of the DZ BANK portfolio by ten percentage points to around 35% this evening. We will buy DAX listed shares, as this index convinces both with its cyclical focus and what is still a fair valuation compared with other indices. Going forward, contrary to the currently prevailing market opinion, it seems to make sense to increasingly keep a watch on defensive stock again, such as healthcare and food shares.