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by Christoph Platt, Euro am Sonntag
S.Another record: In May the DAX reached a new all-time high of 15,538 points. And that in May – a month that does not have a good reputation in the financial markets. The stock market adage “Sell in May and go away”, in German: Sell in May and disappear, should be familiar to almost every investor. It recommends avoiding the historically weak stock market months from May to September inclusive. The second part of the Bonmotion advises people to return to work: “… but remember to come back in September” – remember to return in September.
This year, despite the intermittent high, there seems to be something to the saying again. On May 4, the DAX fell by almost three percent, and on May 13 it also fell significantly over the course of the day. Two days with heavy losses – May lived up to its reputation.
On both days, reports from the USA were the trigger for the price declines. On May 4th, US Treasury Secretary Janet Yellen indicated that higher interest rates would be possible. Despite cautiously speaking of very moderate hikes to avoid overheating, the markets reacted violently. A little over a week ago, it was the high inflation figures that startled investors. Prices in the US were 4.2 percent higher in April than a year earlier. Inflation had not been so strong in almost 13 years.
The background to the price losses is the same in both cases: Investors are concerned that the central banks will loosen up Monetary policy could move away. The amount of fresh and cheap money pumped into the markets month after month could decrease. Higher interest rates would make bonds more attractive and reduce the relative attractiveness of stocks compared to bonds – which would lead to the withdrawal of investors and thus falling stock prices. Corporate credit burdens would also increase if interest rates were higher, thus diminishing profits.
So are the volatile days in the first half of May a foretaste of the weeks and months ahead? Most experts say yes. “The rising inflation will accompany us well into the second half of the year,” says Johannes Mayr, chief economist at Eyb & Wallwitz asset management. As long as it is an issue, investors will remain concerned that the central banks will turn away from their loose monetary policy.
However, it is less likely that inflation will remain very high in the long term. “The current development is driven by special factors,” says Mayr. The prices of raw materials have risen sharply year-on-year, and supply and supply bottlenecks are causing prices to rise in individual sectors of the economy. Twelve months ago, on the other hand, the economy was down as a result of the first corona wave, so the basis of comparison for today’s figures is very low.
“In the fourth quarter, inflation will become less important, but we will have to get used to values above two percent,” said the economist. “But it only becomes dangerous when doubts arise about the support of the central banks.”
A look at the direction of the investors often provides an indication of whether further adversity is imminent. Here the picture is mixed. The majority of optimistic investors pose a threat to share prices. “Investors’ expectations of the further economic development are high and the stock of those who expect prices to fall is small,” reports Hans-Jörg Naumer, Head of Capital Market Analysis at Allianz Global Investors. This is shown by sentiment indicators from Sentix or the US Retail Investors Association AAII. “It’s hard to exceed those expectations.”
On the other hand, not all investors are fully involved in the stock market. “There is still a lot of money available to invest,” says Naumer, referring to the persistently high assets of money market funds in which investors park their capital. “Many want to buy and will thus support the market if weaknesses are evident.”
Recovery priced in
The further development of the pandemic is difficult to predict. From this side there is more danger than further positive impulses. “Corona is priced out, a strong economic recovery priced in,” says Naumer. The hope of getting the disease under control through vaccinations is already in the courses, not a setback. The dire situation in India, however, clearly shows how quickly catastrophic consequences can arise if virus mutations spread rapidly.
A look also falls on the large technology groups. They have been punished several times in the past few weeks and their dominance tore the broad stock market down with them. “Technology stocks are extremely expensive and very sensitive to changes in bond yields,” warns James Athey, senior investment director at Aberdeen Standard Investments. Rising interest rates, as seen on bonds in recent weeks, would have a negative impact on future corporate profits. Athey believes that the very expensive segments of the stock market, such as the technology sector, will suffer.
Given the risks, should investors follow the stock market adage “Sell in May” this year? The majority of experts say no – for two reasons. “The economic momentum for the next two years looks very good,” says Eyb & Wallwitz economist Mayr. “The volatility is likely to remain elevated. The economic environment does not speak for a strong market correction, however.” Governments around the world, especially the USA, have launched huge funding programs that should soon be reflected in the business figures of the economy.
However, there are also very practical reasons against exiting the stock market: There is a lack of alternatives. Despite higher yields, fixed income securities are still quite unattractive and can hardly serve as a safe haven. Other investments are not as liquid as stocks or hardly less volatile.
A good advice is probably not to tackle the hottest irons at the moment, but to attach more importance to solidity. This is possible with funds that do not necessarily have to be 100 percent active in the stock market or that rely on particularly reliable companies. With them there is no need to look at the calendar to be as well positioned as possible with the depot.
Corporations that consistently pay above-average dividends are considered very solid. Because such a distribution policy disciplines the use of the free funds. In the group of global dividend funds, the BL Equities Dividend is particularly stable. Fund manager Jérémie Fastnacht is looking for high-quality companies with good growth prospects and remains loyal to his stocks for a long time.
The US stock market is highly valued. It looks better in Europe. In addition, the European economy has some catching up to do and the stock market has correspondingly high potential. With the RB LuxTopic Aktien Europa, investors can use a fund that has achieved fine growth with low fluctuations. Only stocks that have recently performed well and stably are included. In addition, fund manager Robert Beer hedges the portfolio against high losses.
The Xtrackers MSCI World Quality ETF includes companies from the broad MSCI World share index that are on particularly safe feet. They have a high return on equity, stable earnings growth and little debt. In the long term, this sub-index has clearly outperformed the MSCI World. Investors should be aware, however, that the expensive tech giants Alphabet, Microsoft, Apple and Facebook are weighted the highest.
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