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Well in the race: Car manufacturers such as Porsche, BMW and Mercedes-Benz have driven the stock market hype with price gains in recent months


The Dax record a few days ago made it clear: The stock market defies all uncertainties and is trading at a historically high level. Neither the war in Ukraine, nor high energy prices and inflation rates, nor the interest rate policy of the central banks can apparently shake investors' confidence in the long term. This is only surprising at first glance: In fact, many companies have been able to continue their business quite successfully in recent months against all odds. The result was billions in profits and high dividends – both of which are always a joy for shareholders.

However, it is unlikely to go on like this. The professionals from the world's largest hedge funds and sovereign wealth funds are already preparing for price declines across the board. And experts also expect problems in Germany. "The production costs of many companies remain high. In addition, many are threatened with an increase in personnel costs," wrote Markus Wallner, market analyst at Commerzbank, in a recent commentary. According to the expert, margins are likely to be under pressure not only for German carmakers, but also for "defensive" companies.

The overall economic development is also apparently not quite as good as many have already assumed. Last week, the Federal Statistical Office attested to a decline in quarterly growth in gross domestic product (GDP) for the German economy for the second time in a row. So it's official: Germany fell into a recession last winter, despite all confidence.

Experts believe that this could have a particular impact on those stocks that have driven the stock market hype in recent months. Above all, the papers of two sectors stood out, such as an analysis by DZ Bank: European manufacturers of automobiles and luxury goods. "The price upswing was strongly based on China's opening up after the Corona crisis and easing recession concerns in Europe and the US," says Sven Streibel, the bank's chief equity strategist. "After a long dry spell, sales in the above-mentioned industries were able to recover in this environment." In the luxury segment, as the case of the French giant LVMH shows, just a few reports last week were enough to cause prices to plummet significantly.

But where do investors find price opportunities at the current high price level instead? It seems obvious to look for stragglers: industries that have underperformed on the stock market in recent months and that may be able to catch up in the coming months.

An analysis shows that such stocks can certainly be found. The Eurostoxx 50 index, for example, the European counterpart to the Dax, has performed similarly well to the German benchmark index in recent months. Over the past twelve months, both indices have risen by around 10 percent or even slightly more.

However, some Eurostoxx sector indices are far from achieving this increase. Above all, the following stand out negatively:

  • real estate stocks (down almost 40 percent over the past twelve months),

  • Papers from the health care sector (minus 7 percent),

  • New Energy shares (also down 7 percent),

  • Commodity stocks (down just under 2 percent)

  • energy suppliers (with an increase in value of only 1 percent),

  • Chemical stocks (up 2 percent).

The reasons for this underperformance are manifold and differ from industry to industry. "Real estate equities have come under the greatest pressure over the past twelve months due to the rapid turnaround in interest rates by central banks," Joachim Schallmayer, Head of Capital Markets and Strategy at Dekabank, told manager magazin. The entire real estate sector is under extreme pressure.

Health care stocks, on the other hand, "outperformed extremely strongly" during the peak phase of the Corona pandemic in 2020, Schallmayer said. "Since 2021, performance has begun to normalize, which explains the slightly below-average performance relative to the overall market over the past twelve months. Recently, however, stocks from the health care sector have been able to outperform the market as a whole."

According to the expert from Dekabank, the situation was similar with commodity stocks: "Sharp increases in commodity prices had caused the profits of companies in the commodity sector to rise sharply," he says. "However, commodity prices have now turned significantly, which should also prompt analysts to revise earnings expectations downwards in the future." In addition, the possibility of a stronger-than-expected recession in the coming months is weighing on companies.

The crucial question, however, is: Do the stocks that have not yet participated in the price rally have what it takes to catch up? So are there any price gains in these sectors in the coming months?

When will value stocks make a comeback?

It is obvious that there can be no simple answer to this. At best, fundamental considerations are possible, for example about general trends on the stock market. As manager magazin recently reported in detail, some experts see the beginning of a comeback of value stocks. These are the stocks of large companies with a strong market position, high margins and steady profits. If, in addition, such securities are significantly undervalued on the stock market, they meet the definition of value investing.

The U.S. asset managers AQR and J.P. Morgan Asset Management, for example, identify a sustained trend shift from growth to value stocks in major analyses. In the energy supply industry, for example, which is one of the biggest laggards in recent months, a closer analysis could well find stocks that fit into this scheme.

It also seems possible to reflect on economic developments and their impact on certain companies and sectors of the economy. For example, in real estate stocks. "Now that the cycle of interest rate hikes is nearing its end, stabilization should be possible here," says Schallmayer. "Real estate stocks have already corrected very sharply. A stabilization in the medium term and a reversal of impairment losses in the longer term are to be expected."

Or in the case of commodity stocks: "In the commodities sector, little has been invested in the expansion of production sites in recent years," says Schallmayer. "This is likely to support the price of many commodities in the medium term, although there is a strong distinction to be made between commodities." According to the capital market expert, preference should be given to all raw materials that are needed for the green transformation of the economy. "Here, we expect a long-term outperformance of the companies operating in the relevant promotional areas."

However, experts usually place the emphasis in such forecasts on the long term. In the short term, on the other hand, the prospects for more "defensive" sectors such as utilities on Europe's stock exchanges are not yet rosy, warns DZ Bank strategist Streibel. "In the eurozone, for example, the phase of interest rate hikes has not yet ended," said Streibel. "This does not necessarily mean that there will be further, stronger price declines. However, our optimism for price gains in more defensive stocks is still limited."

On the other hand, Streibel still sees price opportunities in those stocks that have driven European stock markets in recent months: "We remain optimistic about European cyclicals," he says. And by that he means: the automotive, financial and luxury sectors.