Max Severijns

Last quarter, the Shanghai A-share Index did 11 per cent better than the S&P 500 and 15 per cent better than the MSCI Emerging Markets Index. Still, sentiment on China is gloomy. The negativity is fuelled by large amounts of bad news. 

With stock market indicators showing rapid growth, what is happening? Is the bear market ending or is this just a regular bear market rally that will soon end? Some way we might be facing a recovery, others say that it’s just hopeless optimism.

The largest economy in the eurozone is weakening. The German Dax index has been hit unprecedentedly hard in recent months. The discount that has emerged on equities presents a prime opportunity according to specialists. “The economic situation in Germany is lousy, to say the least, but the stock market looks good.”

An energy crisis is imminent in Germany. The renowned trade surplus became a trade deficit in June. Inflation is dire and consumer confidence is at an all-time low.

Europe’s energy supply is under severe pressure, and the 8.9% inflation rate in the eurozone seems to be cushioned only by sharp increases in interest rates, which could push the European economy into recession. Is Europe still the continent you want to be in as an investor?

Although the European economy had a relatively good second quarter, with economic volumes up 0.7% on the first, concerns for the second half of the year remain high.

Financial markets expect a further increase of 140 basis points in European Central Bank interest rates by the end of the year, suggesting a steady path of increases of half a percent per six-weekly meeting. Worsening economic conditions in the coming months could however lead to an early shortening of the tightening cycle. It is balancing on a thin rope, investors and strategists tell Investment Officer.

The eurozone looks increasingly weak. The euro slipped to parity with the dollar last week and a peripheral debt crisis threatens if interest rates rise sharply. With Italian Prime Minister Mario Draghi’s departure announced on Thursday, the stability of the euro is anything but certain.

This year is a tough one for tech stocks. Even companies like Dutch-based ASML, Europe’s leading high-tech company and the world’s main supplier of machines for the semiconductor industry, have seen their share prices fall by more than 45 percent this year, despite record profits. For investors, these are not the times to be very courageous, because the really big risks have not yet been discounted. 

Germany has unexpectedly reported its first trade deficit since 1991. The reversal of the trade balance in Europe’s largest economy shows how difficult it is for German companies to handle rising costs of oil and gas. Economists at ABN Amro and Nomura meanwhile expect Europe will enter into a recession.

The global macro environment will continue to be anything but normal over the next five years. Investors will have to tread a volatile and challenging path. “Our expectations for a more volatile macroeconomic and market environment call for low and realistic expectations for asset market returns over the secular horizon.”

While most asset classes are recording double-digit losses this year, one corner of the market is holding its own: European emission rights. Global ETF provider KraneShares sees its carbon allowance ETF stand year-to-date at a positive 0.26 percent.