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Dax on recovery course? Four reasons why it is still too early to give the all-clear

2022-10-08T07:39:52.549Z


Dax on recovery course? Four reasons why it is still too early to give the all-clear Created: 08/10/2022, 09:30 From: Dr. Jorg Kramer dr Jörg Krämer is chief economist at Commerzbank. © Commerzbank/N. Bruckmann/M. Litzka In view of the Ukraine war and growing fears of a recession, the Dax has gone into reverse. Just a few days ago, the German stock market barometer reached a new low for the ye


Dax on recovery course?

Four reasons why it is still too early to give the all-clear

Created: 08/10/2022, 09:30

From: Dr.

Jorg Kramer

dr

Jörg Krämer is chief economist at Commerzbank.

© Commerzbank/N.

Bruckmann/M.

Litzka

In view of the Ukraine war and growing fears of a recession, the Dax has gone into reverse.

Just a few days ago, the German stock market barometer reached a new low for the year.

However, the prospect of a possibly less drastic interest rate turnaround by the central banks has recently boosted prices again.

The chief economist at Commerzbank, Dr.

Jörg Krämer remains skeptical.

Frankfurt – The Dax has fallen by around 20 percent since the beginning of the year.

Institutional investors such as managers of equity funds or insurance funds have already sold, the price-earnings ratio of the Dax is only 10. However, I do not believe that the downward trend in the Dax is over yet:

Reason 1: High inflation and interest rate policy

First, in the past, share prices have often only recovered when US interest rates have fallen and hopes of an economic revival have arisen.

But this time we have stubbornly high inflation in both the US and the euro area.

A few rate hikes are not enough to solve the problem.

Rather, the US Federal Reserve is likely to raise its key interest rate to 5 percent by spring next year.

It has announced that it does not intend to lower its interest rates quickly thereafter.

This also applies to the ECB, which has only raised its deposit rate to 0.75 percent and is still a long way from an interest rate that will lower inflation in the medium term.

An end to the rate hikes, which in the past was often a prerequisite for a sustained recovery of the Dax, is not yet in sight.

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Reason 2: Ongoing earnings revisions

Second, the fact that analysts are currently downgrading their earnings estimates for listed companies in both the US and the euro area and are likely to continue to do so supports the possibility of further falls in share prices.

In any case, we are far from systematic upward revisions.

But in the past, share prices usually only turned upwards when the phase of steadily falling profit estimates by company analysts came to an end.

Reason 3: price to book ratio

Third, the valuation of the shares still speaks for caution.

Compared to the expected corporate profits, the Dax prices are in a range in which a turn for the better was often observed on the markets in the past.

But in times of crisis, investors usually look at more conservative valuation standards and compare share prices not with the strongly fluctuating company profits, but with the more stable balance sheet book value of the company, which results from the difference between a company's assets and liabilities.

The price-to-book ratio of the Dax is currently in the range of 1.3, while in earlier phases of the recession at the end of a bear market it was even lower, between 1.0 and 1.2.

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Reason 4: Too much optimism

Fourth, the fact that the large group of US private investors, unlike most institutional investors, are still optimistic speaks against an end to the Dax decline.

They haven't sold stocks in a big way yet, so they're vulnerable to bad news.

And falling corporate earnings as a result of the recession would be bad news that could make investors sell.

Nobody has a crystal ball.

Investors can only weigh arguments against each other.

But all things considered, there's more evidence to suggest that the fall in stock prices isn't quite over yet.

It will probably first become apparent that the inflation problem is easing and that the US Federal Reserve will stop raising interest rates further.

However, investors should prepare for a re-entry into the market.

They can only act quickly when the conditions for a sustained recovery in share prices are met again.

In the long run, it is not advisable to ignore equities.

About the author: Dr.

Jörg Krämer is chief economist at Commerzbank in Frankfurt.

Source: merkur

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