Deutsche Bank: Liquidates its profits from European shares – The rally is over, ‘alert’ on six fronts

By Eleftherias Kourtalis

The risks outweigh the positive catalysts for the continuation and so the German bank decided to liquidate its profits and downgrade its attitude towards the European shares after the rally they recorded since mid-June, as things show, it will not continue .

Among the factors driving investors back into the market in mid-summer were falling bond yields, China’s recovery from its second-quarter lows, a much better-than-expected earnings period for listed and small valuations in P/E terms.

“Unfortunately, the current list of catalysts is less promising,” notes Deutsche Bank, noting that the EURO STOXX 50 index is now trading slightly above its year-end target of 3,640 points. US bond yields are back above the 3% mark and while curve inversions are not the best indicator, the US yield curve has now inverted the most since 2000.

At the same time, China rebounded strongly from the very weak growth data of the second quarter, but did not maintain the positive momentum. Also, the slowdown in economic growth in Europe increases the risk of negative reviews for companies’ profitability. “Our economists expect a mild recession in Europe in the coming quarters and foresee significant risks in case of worsening energy shortages,” the German bank notes.

Thus, DB takes its profits from the market, and changes its overweight stance to neutral.

In summary, as the bank points out, as expected, European equity markets rose in the third quarter due to relatively positive news flow on the following fronts:

-Profitability: Q2 results were better than expected

-Inflation: Inflation has temporarily eased from its peak

– Valuations: P/E ratios adequately discounted the higher interest rate environment

– Interest rates: German and US bond yields fell sharply

– China: Recovery from a very low base in the second quarter

– Placement: Systematic strategies in particular have increased their positions in stocks

However, as far as the sequel is concerned, the challenges are many and do not justify the further rally, as DB specifically warns the six factors that make the bank very cautious now regarding the outlook for European stocks are as follows:

– Profitability: The German bank expects a mild recession in Europe over the next three quarters. This leaves room for low positive as well as negative earnings growth. With lower real incomes, firms will find it increasingly difficult to pass on higher costs.

– Inflation and natural gas: Different from the US, gas and electricity prices determine the next move in European inflation. German natural gas storages have filled up faster than expected. The risk of forced production cuts has shrunk but remains.

– Valuations: P/E ratios have already seen their lows, according to Deutsche Bank. But “P”, i.e. share prices, could fall further if we see downward revisions in “E”, i.e. corporate profitability.

– Interest rates: Interest rate hikes are likely to continue leading to further tightening of economic conditions.

– China: The Chinese economy has rebounded from very low growth data in the second quarter. However, it could not maintain the positive growth momentum. A structural acceleration of growth will be less easy to achieve, while a possible dispute with Taiwan may lead to increased risk aversion of investment portfolios.

– Placement: While the market is still underweight equities, the third quarter has already seen strong inflows.

To reflect its more cautious view of the equity market, Deutsche Bank is reducing its exposure to cyclical stocks and sectors, downgrading Auto from Overweight to Neutral.

At the same time, it maintains an underweight position in the airlines, chemicals and consumer staples sectors.

It maintains a neutral stance on the following sectors: Utilities, Telecommunications, Banking, Real Estate, Travel & Leisure, Insurance, Retail, Construction & Materials, Financial Services, Media and Industrials.

And finally, overweight remains in technology, raw materials, as well as oil and gas.