BaaderBank: The current weak global economy ruthlessly exposes the profound structural problems in Germany and Europe.
In contrast, America is showing resilience.
To what extent will Europe’s weaker economy also be reflected in a weaker performance of its stocks?
“It’s the economy, idiot!”
As the global economy weakens, European nations can no longer hide their structural deficits behind strong export figures.
These are now having an even more negative impact. There is no improvement in sight.
Due to the relationship crisis of the traffic light government, which is costing it the ability to act, economic policy uncertainty continues to increase.
This will not stimulate investment by companies or the desire to spend among consumers, who have recently been increasingly resorting to fear-mongering due to fear of unemployment.
In view of the persistent deterioration in sentiment in industry, the service sector and consumption, the German economy is increasingly sliding into crisis, according to the ifo Institute – business expectations have worsened for the third time in a row.
Stagnation is the best expectation for the foreseeable future.
Economic dynamism is also lacking at the European level.
In France, the one-off economic effects of the Olympic Games will soon be history in the absence of structural changes. However, germanosclerosis is particularly noteworthy.
Apparently the economic soil in America is better fertilized.
Even though growth momentum is slowing, the US economy is proving more robust.
America also has problem areas, such as the staggering budget deficit of 6.6 percent, which is not expected to improve under either Harris or Trump.
However, new debts are primarily being issued to strengthen the location, including for sustainable re-industrialization and securing important supply chains, e.g. for semiconductors.
Similar developments can also be seen in Asia.
Moreover, Europe should not expect any sympathy if Kamala Harris wins the election.
America will consistently expand its competitive advantages, even to the detriment of Europe and Germany.
At this point, we need to address the German debt brake. It should be relaxed significantly, but only under very clear conditions.
The money may only be spent on improving the location in accordance with market economy principles.
It is a no-go if the state determines what is invested in through planned economy or ideology.
Better transport routes, higher levels of education and higher network quality, energy supply at competitive prices and tax cuts as well as debureaucratization will reverse Germany's deindustrialization and poor economic psychology.
The fact is that we are in a brutal international competition: when the whole world is using debt to restructure its sites or rebuild them, we cannot stand by and watch.
Despite the poorer economic development, European stock markets are not in shambles.
The DAX even managed to reach a new all-time high. Not all business locations are the same as stock exchanges.
First of all, companies are becoming less and less dependent on Germany and Europe.
And the European middle class will always fly, the second and third row of stocks.
European companies are well positioned internationally not only in terms of sales but also in terms of production and skilfully exploit the location advantages in important sales markets such as the USA or China.
Europe’s stock markets also have something to offer
Apart from that, Europe still has great know-how in the industrial sector that is in demand worldwide.
And when America improves its infrastructure and the same thing happens in many emerging countries, many of them also the European and German industrial goods culture.
In fact, listed European companies generate on average around 70 percent of their sales on other continents.
Certainly, with technology, America is undisputedly the strongest economic sector for the future.
Europe can't come close to that. But our focus is on value stocks with strong substance, profitable business models and stable cash flows.
Specifically, industrial stocks from the electrical engineering and transport sectors, among others, are attractive due to the foreseeable global economic recovery.
Banks benefit from increased profitability and share buybacks.
But there are also pearls in the health sector with consistently high margins, some of which are significantly above the European average.
At the same time, they can demonstrate solid balance sheets with low levels of debt.
They benefit from growth prospects in the biotechnology sector as well as from innovations, mergers and acquisitions.
Due to the bad economic news, the valuation discounts of the Eurozone and especially German stocks compared to their US competitors are still at or close to their record levels at around 40 and 45 percent respectively.
The same picture emerges when looking at average earnings yields in Europe and Germany, which, after deducting government bond yields, are well above those in the US.
Overall, this speaks for further price opportunities for European stocks and catch-up potential compared to US stocks, not least for risk diversification compared to high-tech stocks, which are still fundamentally attractive but are viewed more realistically.
Last but not least, both European and US companies from the second and third tier are benefiting from the interest rate cut fantasy on both sides of the Atlantic, as they are much more dependent on financing than large-cap blue chips.
On the stock exchanges, European stocks can certainly keep up with their US competitors, especially since, from the perspective of a euro investor, they have experienced headwinds due to the recent appreciation of the common currency.
Graphic of the week
Market situation – mood too good again?
A well-known stock market saying advises investors to sell stocks in May and return to the stock market in September – almost in time for the autumn rally.
This rule has lost some of its significance today.
But the chances for a golden autumn for stocks are good.
Many large investor groups have ventured back into the stock markets after “Black Monday” at the beginning of August and ensured a V-shaped recovery.
The general risk factors – economic situation, geopolitics, US election – are known and cause less uncertainty.
The fact that the outlook of the largest US chip developer has not exceeded the high expectations as it did recently, despite the “wow” factor, merely creates a pothole on the well-paved US stock highway.
However, if interest rate expectations turn out to be too euphoric, higher volatility can be expected again.
In general, however, the fading fear of interest rates is reflected in the volume of securities loans on the New York Stock Exchange, which continues to rise and contributes to the stabilization of stocks.
Sentiment and chart technique DAX – What comes after the all-time high?
FOMO (“Fear of Missing Out”) is spreading among investors. They are abandoning their defensive stance for fear of missing out on the rally.
In doing so, they are reducing their hedges on the futures markets against falling prices.
Further setbacks would catch optimistic investors off guard and could cause sudden price declines.
However, as has been the case recently, this “air hole” would be quickly cleared.
The significant preponderance of optimists among retail investors on the US stock market serves as a contraindication, warning investors to be cautious about temporary countermovements.
If the DAX continues its upward movement, it will encounter resistance at 18,893, 19,000 and 19,125 points.
In case of a correction, support lies at 18,856, 18,779, 18,680 and 18,662 points.
Market commentary by Robert Halver, Baader Bank
