“As long as key interest rates are rising, equity markets will not turn around lastingly”

In view of the economic outlook, valuation of equities is still ambitiously high. “In recent months, US companies have been able to pass on higher costs to their customers”, Gerlinger pointed out. “Profit margins also continue to be above average and in fact at 1960s levels, which has led to record profits.” Given the expected weaker economic growth and high inflation, however, this development will not last so that pressure on margins is to be expected. Particularly the growth segment remains vulnerable to a potential further rise in yields.

Europe is affected by the weight of sanctions against Russia and suffering from rising energy prices. “Coupled with the economic outlook, this is weighing on the highly cyclical industry in Europe”, Gerlinger added. “Small caps are suffering disproportionately from the current uncertainty.” The more favourable valuation continues to argue in favour of eurozone equities. “Relatively speaking, the UK still offers good opportunities in Europe”, said Gerlinger. “Due to its index heavyweights in banks, which benefit from rising interest rates, health care as a defensive sector as well as commodities, the market offers better opportunities than Euroland.”

Although the emerging markets are very promising in the long term, they are subject to more uncertainty in the short term and are therefore no longer as attractive as in the past. “South America is currently facing political uncertainties, especially because of the upcoming presidential elections in Brazil”, Gerlinger mentioned. “However, the continent is benefitting overall from the favourable commodities environment.”

China, on the other hand, continues to be in the wake of the corona pandemic. “The real estate sector represents the main asset class of the Chinese”, said Gerlinger. “Real estate is for the Chinese what the savings book used to be for the Germans.” The Chinese central bank is expected to continue its expansionary stance. However, this will not be sufficient for the Chinese economy to escape a more severe global economic downturn or a recession in the major Western economies.

A somewhat more defensive positioning is recommended in anticipation of an inevitable recession. Consumer discretionary, which has been underweighted so far, will be increased from underweight to neutral, and communication services will also be slightly increased. “On the other hand, we will be reducing energy and commodities from overweight to neutral”, Gerlinger concluded. “In a recession, prices of energy and commodities are likely to fall.”

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