Movements in financial markets can be divided into phases or cycles, such as the interest rate cycle or the profit cycle. Last year was a good example of the "cycle of hope". After the massive crash of the stock exchanges, investors bought shares in the hope of overcoming the pandemic and, above all, in anticipation of significantly increasing corporate profits. In the first phase, prices rise significantly and markets get optically very expensive, common multiples based on current profits rise significantly. The current second phase is characterized by further price gains, but corporate profits are rising to a higher extent than the markets, thus market valuations are becoming more favorable again. Earnings increases of over 40% are currently expected for Europe in 2021, the P / E ratios in Europe are again well below 20 and relative to the USA at the most attractive level for over 15 years.
The jump in profits is a result of the significant recovery in global economic growth. Cyclical sectors are among the biggest beneficiaries of this phase, their share in Europe is significantly higher than in other regions, while cyclicals in the USA represent around 25% of market capitalization, the share in Europe is 40%.
In the course of the cyclical recovery, interest rates have also risen in recent months, an indication of rising inflation fears in view of excessive economic growth and fears of interest rate hikes by the central banks. The central banks have made it clear that they will not turn raise interest rates until well into 2022. Excess pent up demand can temporarely lead to overshooting prices, central banks are prepared to tolerate short-term increases in inflation even above their targets in order not to jeopardize economic development. With high output gaps, the risk of a sustainable price increase is low anyway.
In the absence of profitable alternatives, the risk-on mode is likely to be prolonged. In general, cyclicals are to be preferred when interest rates rise, they are more dependent on the economic cycle than on the interest rate cycle, have a positive interest rate correlation and higher earnings momentum.
Author:
Horst Simbürger, MSc, CEFA
Managing Director
CONVERTINVEST Financial Services GmbH
28 April 2021
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Note
Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.