Growth expectations dampen equity market outlook

» DZ BANK Research recently revised down its forecasts for global economic growth in 2018 and 2019 from 3.9% to 3.6%.

» The Euro Stoxx and the DAX are likely to rise less steeply as a result of the poorer growth outlook. The new forecasts for the end of the year are: Euro Stoxx 50 3,600 (previously 4,000) points, DAX 13,300 (previously 14,000) points.

» The valuation of both indices remains attractive, their potential is presentable. There are still good investment opportunities to be had.

Geopolitical risks have increased in 2018 although the situation has calmed down somewhat in the past few days. A large number of hazardous areas (trade war USA/China, Syrian conflict, Iran/Saudi Arabia) have been reactivated, not least because of US President Trump, who seems to be shaking off the influence of his advisers more than ever. The dangers that are looming mean that companies and states will show restraint as regards future investments and world trade is also likely to post weaker growth. For this reason, we have recently lowered our GDP forecasts for 2018/19 for virtually all important countries.

This downside revision has direct repercussions on our view of the equity markets. Admittedly, the companies are (still) moving ahead successfully and are also likely to chalk up new record profits this year. Nevertheless, future profit growth, which is now estimated at around ten per cent for the Euro Stoxx 50 and the DAX for 2018 and 2019, is in danger of suffering an early setback in light of the expected investment restraint. Especially the DAX companies, which are characterised by a high degree of openness to the world economy are unlikely to be left unscathed by this development. The more restrictive interest rate policy (the Fed will raise the key rate significantly by the end of 2019, the ECB will increase interest rates for the first time in 2019) is also having an increasingly dampening effect on prices in the equity markets. For this reason we are lowering our index forecasts for the DAX and Euro Stoxx 50 for the end of 2018 to 13,300 and 3,600 points (previously: 14,000 and 4,000 points).

The valuation of the two aforementioned share indices remains attractive at the current level so there are still good purchase opportunities. On the basis of the index gains expected for 2019 (minus risk mark-down of three percentage points) the DAX has a PER valuation of 12.4 (Euro Stoxx 50: 13.5) and earnings yields (the inverse of the PER) of 8 and 7.5%. If the indices climb to our new price targets by the end of the year, the valuation would rise to 13.1 (DAX) and 13.9 (Euro Stoxx 50) and would be slightly above the longer-term average in each case. Given the fact that there is still presentable upside share price potential there are still good purchase opportunities. A few weeks ago we also increased the DAX position in our virtual model portfolio.

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