Welcome to the turtle cycle says Deutsche’s Wöhrmann
As the global recovery just inches along, investors are faced with a challenge, only those willing to take risks may be able to generate attractive returns argues Deutsche Bank CIO Asoka Wöhrmann.
The turtle named Cabeção was worshipped by Brazilian soccer fans for several weeks. The reason: The turtle, a youngster at a mere 25 years of age, predicted that Brazil would win the World Cup. He was wrong. As a result, it was falsely suggested that he had ended up in a bowl of soup. But Cabeção and others of his species are expected to live a long and slow-moving life—one that certainly holds parallels with the global economy’s slowmotion recovery from the financial crisis.
The recovery is now in its sixth year and economic activity in the United States, United Kingdom and especially in the Eurozone still lags behind the level achieved in past upswings. This once again shows that budget crises cast long shadows. Instead of spending or investing, the private sector is saving its money and deleveraging.
For investors, these are challenging times as well. Low interest rates and unorthodox monetary policy measures are pushing down yields on money and sovereign-bond markets. As a result, investors are increasingly focusing on corporate and mortgage-backed bonds.
The yield spreads between corporate and mortgage-backed bonds and sovereign bonds have leveled off in the process. And the cushion that protects against drawdowns caused by interest-rate rises has subsequently flattened. As a result, increasing numbers of investors areturning to equity markets as a way to solve the yield dilemma.
But those banking on equities should be aware that the bull market runs in phases. In the first phase, which lasted from 2009 through mid- 2011, equity markets profi ted from the fact that central banks prevented a systemic crisis with their ultra-expansionary monetary policy. In the second phase, equity valuations normalized and price-to-earnings (P/E) multiples rose. A review of historical P/Emultiples reveals that equities are now more or less fairly priced.
In the third phase, which has just begun, corporate earnings are likely to move into the spotlight. Quality should be the focus in this phase. Stocks of companies with above-average earnings growth in particular will be the winners, in our opinion.
By contrast, investors may want to consider underweighting bonds. The “turtle” Günther Schild, the mascot for German Bunds, was sent into retirement by the German government back in 2012. In the current low-rate environment, even this mascot would not be able to sway safe-haven-oriented investors. Equities, by contrast, are likely to remain in demand—even without a mascot pedaling them.