Apart from the DAX the corporate profit performance of companies listed in the leading indices has been stagnating for several years. But share prices have risen nevertheless, admittedly primarily due to falling capital market yields. In the meantime, these made the upside potential for the future valuation of the equity markets look unlimited. In many cases, it was merely a question of how high the PER could rise in an environment of zero or negative interest rates and no longer of the business performance of the companies themselves.
Market players are now likely to gradually turn their back on this view. After all, capital market yields have already been rising for some time now in the largest debtor market: for the first time in several years the valuation of US equity markets has risen significantly while yields have also increased considerably at the same time.
For investors in shares this means that in the future profit growth will have to be high and robust enough to offset any potential losses from a valuation compression. Investors should not delay the search too long as (US) yields are also likely to rise because inflation will increase faster again in the USA in 2017/18. This would be bad for nominal rate bonds, but good for shares, due, among other things, to higher increases in turnover (in nominal terms). Cyclical shares, which we have been recommending as a BUY for a few months now, for example within our sector allocation, are likely to have good prospects of price gains in 2017/18.
We take an upbeat view of the prospects for global economic growth in 2017/18, thanks partly to the acceleration of growth in the emerging markets and partly to possible fiscal policy programmes. Against this background, the DAX companies would appear to be very well positioned for a further upswing in prices. Now that most of the index-internal crises appear to have been digested, corporate profits are likely to grow strongly here in 2017/18. At the moment, most DAX companies are poised to chalk up record earnings and this is hardly likely to change in the near future.
We are therefore raising our year-end forecast for the leading German index from currently 12,000 to 12,500 points. This corresponds to a further potential of almost eight percent. We put the DAX’s PER valuation at 13.4 towards year-end, which would be somewhat higher than the long-term average of 13.0 – but not yet in expensive territory. Within the year we believe the price path of DAX and Euro Stoxx 50 stocks will be more volatile and hence more prone to setbacks in the first half of the year than in the second half of the year. Lately share prices rose so steeply that the profit performance could not keep up with them.
The political environment will continue to influence share prices in 2017. However, we also remain of the opinion that in light of the very good economic performance possible share-price fluctuations will also offer good opportunities for active stock buying/selling.