So far this year, the stock markets have — despite turbulence in the banking sector — shown strength above all. While the equity markets tend to reflect optimism, the bond markets are signaling recession risks. Philipp Dobbert, chief economist and Head of Wealth Management at Quirin Privatbank and quirion, explains why this is and how the further outlook should be assessed.
In March, distress at banks only briefly halted the upswing on the stock markets. In early May, difficulties at regional banks in the US made headlines again. Is there a banking crisis after all?
The question is whether there is a banking crisis or crises at individual banks. It makes a big difference whether a problem affects the banking system in general or whether these are merely specific problems with limited consequences. To me it looks very much like the latter, and so far the market seems to judge it similarly. The crises at Silicon Valley Bank and Credit Suisse are no longer an issue. And the difficulties that some regional banks in the US are still facing have so far had hardly any effect on the broader development of the equity market.
Like the problems at banks, the subdued economic development likewise does not appear to be shaking share prices. In mid-May, the DAX was heading toward new highs, and in the US tech stocks were climbing again. Is this a stable upswing or just a flash in the pan?
No one can say in advance how long an upswing on the equity market will last. You only ever know that in hindsight. What we do know is this: highs are not a rare phenomenon on the equity markets but the rule. The trend on the equity market is directed upward over the long term. As for economic developments: on the stock markets, it is not the view in the rear-view mirror that counts. A rather weak economic development was anticipated in prices last year. At the moment, the markets are betting that the central banks' interest rate hikes are gradually coming to an end. In the US in particular, this is a driver of prices and a key reason for the positive trend in tech stocks.
But the interest rate markets, especially in the US, have been signaling recession risks for a long time now. Isn't that a contradiction to rising share prices?
The bond market in the US has indeed had an “inverted yield curve” for months now, and in Germany, too, this has been the case for a while. That means: government bonds with short maturities have a higher yield than long-dated ones. In the past, this was often a signal that a recession would follow after a certain time lag. Whether the signal is to be interpreted the same way again cannot be said today. In 2022, the key rate hikes were as dynamic as almost never before. And when short-term yields rise that fast, the long-term ones more or less inevitably lag behind. Even if a recession does come, though, it is an open question when that will happen. In the past, sometimes more than a year passed between an inversion of the yield curve and the recession. The equity market will not stand still and wait that long.
Rising prices were not seen only on the equity markets. The euro has gained significantly in value against the US dollar. What is behind that?
Last year, the euro's slide against the dollar made big headlines. In our assessment, the large gap between the key rates of the two currency areas was the main reason for the development. Now we are seeing a normalization. The interest rate gap has narrowed and will probably narrow a little further.
What does that mean for quirion's portfolios?
In our portfolios, countries are weighted according to their respective market capitalization. The US accordingly carries a high weight. Last year, our portfolios benefited from the strength of the dollar. But compared with the range of fluctuation of equities, currency swings barely register in our portfolios.
What is having a stronger influence on the portfolios' performance right now?
Our bond portfolio is currently benefiting from the reinvestment effect. Maturing older bonds with lower interest rates are being replaced step by step within the ETFs by new ones with higher rates. This also raises the yield to maturity of our portfolio. It currently stands at 3.5 to 4.0 percent. Yield to maturity is the return that can be achieved if bonds are held until maturity. Because quirion invests via bond ETFs, the yield to maturity changes on an ongoing basis.
And what about the equity portfolio?
In principle, our equity portfolio captures the upswing on the equity markets. However, two factors are currently weighing on it: many emerging markets are developing positively in economic terms, but the equity markets there do not reflect this. And the return factor “value” has fallen back again in the course of the upswing in tech stocks; small caps are affected too. Over the long term, though, we see ourselves as well positioned — namely as broadly as is cost-efficiently possible. Because we position ourselves this way, we can dispense with forecasts and speculation about the course of short-term trends in our investment strategy. Individual markets do sometimes perform better than a globally diversified portfolio for a while. But in terms of the ratio of return to risk, a global portfolio remains superior over the long term to investing in individual markets.
