The markets are too cheap
Luxembourg, 06 May 2021 – Record highs in indices or stocks reflexively trigger fears of a crash. In recent weeks, many stocks rose to record highs – but that is still not the end of the line. “There is too much pessimism in the markets. We are more likely to see additional positive surprises”, said Carsten Gerlinger, Vice President of Moventum AM.
Some of the popular models are currently assessing the markets as overbought or even overheated and are expecting an overdue correction. One of the reasons for that outlook is the good reporting season with numerous very strong and positive earnings surprises that is already seen as factored in, as normalisation following the pandemic crisis. “Rather, earnings expectations are underestimated”, Gerlinger pointed out. The economy is not surging after a crash, only to collapse again. “We are seeing more sustainable growth worldwide, a new economic cycle that was initiated by the pandemic crisis”, Gerlinger added.
As with some social issues, the pandemic has acted as a catalyst for some businesses. “Many of them found that they were heading in the wrong direction, or at least were still carrying a lot of baggage”, said Gerlinger. This is now being corrected quickly and sustainably. “In some instances, high investments in equipment are needed to make the business fit for the future, to restructure, and then to take off again.”
For machinery and plant manufacturers, for example, this means a long-lasting economic cycle. “The example of the automotive industry clearly shows what to expect”, Gerlinger highlighted. “It is no coincidence that VW is announcing the biggest turnaround in its history during the corona crisis, combined with billions in investments.” The other German automakers are also taking new approaches, are insourcing parts of needed components production and investing in battery research and construction, for example, or even in chip manufacturing.
“Entire industries are being created – with all the cascading effects on suppliers, providers of equipment, machinery and so on”, Gerlinger emphasised. “That is a very sustainable economy building up, and it will lead to further profit increases.” Companies can be expected to become even more profitable, and share prices, already considered high, could rise further. “If too many market participants are afraid of a crash, there may be a downturn”, Gerlinger said. “That would be a self-fulfilling prophecy.” But the underlying assumption that the current recovery is a one-off event would be wrong.
In the medium and long term, the new earnings momentum will also carry the markets. “From a risk perspective, it is certainly appropriate to take others’ views into account when investing”, Gerlinger said. “Nevertheless, investing should not be done in anticipation of a market crash, but in anticipation of a rekindled economic cycle with rising profits globally.”
Additional information is available at www.moventum.lu