Slowing growth and the equity market – what a look at the cycle teaches us
History doesn’t repeat itself, but it often rhymes. This is true on the equity markets, even during a pandemic.
Many growth rates are currently at their peak. This applies to economic growth in general, but also to the sales and profit growth of many companies in particular. In addition, it can be assumed that the financial and monetary support at both government and central bank level has also passed its zenith. What sounds threatening at first is simply the inevitable path back to normality, explains Christian Schmitt, Lead Portfolio Manager of the Ethna-DYNAMISCH.
New versus old normality
The world has moved on. Many things are different after the crisis. But that is true for every crisis. After crises have been overcome, it is necessary to adapt to a new normality. As individual as each crisis may be, the pattern according to which the markets develop in an economic cycle of downturn, recession, upswing, and subsequent boom always has certain variations - but in the end the similarities outweigh the differences. In this respect, the new normal is a constant, recurring element in an overarching view. Or simply: old normality.
No bells are rung to start the cycle
During the early phase of a cycle, the biggest problem is that the market has already priced this in as soon as it is actually reflected in the real economy. In practice, the concrete demarcation of the early and late phases of the cycle is only possible by looking at the relative price development of cyclicals to more defensive stocks ex-post. In retrospect, the early cycle has been almost exemplary, even given the recent pandemic crisis. Cyclicals have outperformed more defensive stocks since April 2020, before gradually normalising in summer. This is in line with empirical evidence, which suggests that the early cycle lasts around one year.
The next phase is beginning
So, what can we expect from the mid-cycle that has just begun? First of all, that we can definitely talk about a return to normality, because on average the phase now ahead of us lasts almost four years. Although the expected equity market returns are no longer as generous as in the first year of the upswing, they still remain attractive. The transition phase, in particular, may well be a little more turbulent on the equity markets, as market participants are exposed to a new kind of uncertainty about the future outlook as a result of the aforementioned factors. However, it is difficult to generate a sustainable additional return from sector allocation alone. The upcoming equity market phase is more likely to be characterised by a continuous sector rotation, in which individual themes take up more space once more and structural growth themes can make a longer-term difference.
The peak does not signal the end
Accordingly, investors have no cause for concern just because, for example, absolute growth rates have peaked. More normality will do the capital markets good in the medium term. In the Ethna-DYNAMISCH, the most offensive multi-asset fund of the three Ethna Funds from ETHENEA, we act accordingly and combine our macro expertise with fundamental single stock analysis. In this way, a concentrated single-stock portfolio forms the resilient core for the high equity allocation that has been maintained since the summer of 2020, although the current transitional phase in the cycle has recently been judiciously accompanied by various hedging components. As a result, our clients continue to receive the risk-controlled access to the global equity markets with which they are familiar.
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