The escalation of the Turkish crisis illustrates how quickly Donald Trump can create unrest outside the USA. Until the congressional elections in the USA in November, the US president could increasingly try to further his own good by attacking alleged opponents, also as a means of detracting attention from his personal affairs. Investors can comfort themselves in the knowledge that Trump’s rhetoric and his deeds are not always one and the same thing. But it is precisely this unpredictability that is adding to companies’ and investors’ nervousness. While the first stage of the escalation „only“ affected part of the trade relations between the USA and China, a whole array of new risks are now looming on the horizon in places such as Iran and Turkey.
Until now US companies have been virtually unaffected by the burdens, with the domestic economy recording growth rates not seen in a long time. Markets are brushing aside the issue of a crash on US stock markets. Until a few days ago, the volatility barometer VIX was still at its lowest level since January 2018 before the crisis in Turkey unfolded at the weekend. However, with profit margins close to record levels and the buoyant performance of share prices on the Nasdaq et al, there is once again cause for concern: last week, the value of all Nasdaq composite shares represented more than half of American economic output – the last time such a high value was reached was in March 2000. Yet the most recent upturn was largely based on “pump priming” in the form of tax cuts that took place in 2018.
While the US economy and stock markets are growing dynamically, European companies are coming under pressure from the rising number of trouble spots. Faced with the increasing international uncertainty, managers are somewhat more reluctant to invest than in earlier phases. Adding to this time and again are the political and economic problems within the EU countries (e.g. Brexit). The next test of endurance can be expected in the form of the discussions expected to take place from autumn on EU concessions to Italy.
Until now, the accumulation of crises has not yet found reflection in weaker corporate results among the DAX and the Euro Stoxx 50 companies. While earnings growth expectations for 2018 have been revised down by a few percentage points, growth of three to five percent still seems to be on the cards. The random samples of company reports taken during the current reporting season do not signal an impending drop in profits as yet.
For stock markets, however, the accumulation of crises is becoming increasingly negative. And given the current difficult situation, it is very unlikely that sentiment will brighten soon. In the meanwhile, we expect market sentiment to remain subdued until year-end.
Ultimately, the decisive factor is whether there will be any consequences for companies in real economy terms and how great these will be. While the burdens resulting from the respective crises might not appear to be all that dangerous when viewed in isolation, the point could soon be reached in which a combination of burdens precipitates a stagnation or even decline in corporate profits (= recession).
However, we see a greater likelihood that the political conflicts worldwide will not escalate further and that economic growth will stabilise again. Stock markets would then again display the features of an environment of growing corporate profits and low capital market interest rates, with price gains possibly being recorded. For this reason, we remain upbeat for stock markets, albeit at a significantly lower level than before.
In our revised stock market forecast for year-end 2018, we expect the DAX to reach 12,600 (previously 13,700) points and the Euro Stoxx 50 3,500 (3,700) points. By mid-year 2019, our currently longest forecast horizon, we expect the DAX to rise to 13,300 (14,200) points. The Euro Stoxx 50 should have risen by then to 3,600 (3,900) points. Based on the consensus estimates of corporate earnings for 2019, the valuation of the DAX in our target price for mid-year 2019 would be 12.5, i.e. a reading slightly below the historical average. In view of the mounting political and economic risks, we consider this slight valuation discount to be justified.