The new year starts with the familiar topics: the US elections are the focus at the beginning of the year, and of course the capital market is watching the latest developments in the pandemic with hawk eyes. You can read how we assess the current situation in today’s financial market.
More than two months later, we are still concerned with the US election. No, it is not about the incumbent president’s shameful struggle to contest the election results by all means. Rather, it is about the balance of power in the future US Senate. The two Democratic candidates won the two outstanding Senatorial seats for the state of Georgia. As a result, this leads to a slim majority of the Democratic Party in the Senate. This can have a positive effect on US consumers and the economy as early as the first few weeks of the new administration. After tough negotiations in Congress, a one-off payment of “only” 600 US dollars to US citizens was agreed in the new aid program. However, since the Democrats prefer a generous payment of $ 2,000, the new Senate could soon approve that payment and pump another $ 400 billion into the economy. In addition to the $ 900 billion in aid that was already decided in December, the growth prospects for the US economy are brightening and making a 5% increase this year increasingly likely.
The coronavirus, on the other hand, has hit the German economy again. The extended and stricter lockdown in Germany will inevitably have a negative impact on economic development at the start of the year. After the final quarter in Germany has probably already developed negatively, we can now imagine a similar decline for the first quarter. After all, the EU has now also released the second vaccine and thus confirms our hope that the economy should recover significantly in the course of spring – along with an improved health situation in the republic.
US Stock Market – Expensive or Attractive? Both!
The stock market continues to rely on the recovery scenario of the global economy and ignores the persistently high infection rates in the US and Europe. The prospect of further fiscal aid payments in the US after the election of the Democrats in Georgia has given the market new impetus. However, the valuation metrics, such as the price / earnings ratio, are at exceptionally high levels and are preventing us from expanding our overweight in the US market even more. Overall, however, we remain optimistic, as US companies, especially from the technology sector, are significantly more profitable than other regions. At the same time, the stock market is supported by the ultra-expanding central bank. We expect the US Federal Reserve to continue its bond-buying program unchanged this year, investing US $ 120 billion a month in the bond market. We expect the same from the European central bank policy and therefore do not derive a sustainable increase in yields on Bunds for 2021. Nevertheless, some movement on the bond market could be observed in the first few weeks of the year, as we expect strong issuing activity by states and companies in Europe in the first two months. This could, at least in the short term, put bond prices under pressure and make yields a little more attractive. In this environment, we would buy bonds and focus our bond portfolio more aggressively. We continue to see further investment opportunities in the bond satellite segment: In view of our stock market assessment, we expect convertible bonds to generate positive earnings potential this year. The segment is characterized by its high weight in technology and the USA and is therefore attractive from our point of view.
Euro strength stopped?
The European reserve currency has been able to build up a certain strength in the past six months. The euro was able to establish itself above the 1.20 mark against the US dollar. We can imagine that the market will tackle the 1.25 mark in the short term. However, from our point of view, important fundamental data speak against a longer lasting euro strength. In the past few weeks, the yield differential between the two regions has widened in favor of the USA, while at the same time growth expectations for the US economy have risen more sharply than the euro zone. In our view, both speak for the US currency. In the past few weeks, the focus has also been on the development of the euro against the British pound. Now that the negotiating partners were able to agree on a free trade agreement at the last minute, the potential for tension has reduced, and we are now expecting a sideways trend in the coming months.
Live stream on December 14, 2020 from 6 p.m .:
With Hans-Werner Sinn, Former President of the Ifo Institute: Corona and the miraculous increase in money in Europe
– Here is the stream! –