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May is traditionally one of the weaker equity months and usually heralds the relatively quiet summer period on the global stock markets. However, stock markets have recently been far from pre-summer doldrums. The clear expectation that an agreement would be reached in the U.S. debt dispute led the major stock market indices to new highs for the year in advance. At the same time, it seems as if the markets are simply ignoring the clear risks of recession. For on closer inspection, some signals unmistakably point to an imminent economic downturn. For example, the relative performance of small caps, which are considered to be highly sensitive to the economy as a whole, continues to be negative. There are also clear warning signs at the sector level. Defensive stocks are in overriding demand, while cyclical sectors are being avoided. In general, it is noticeable that a clear regime change has taken place in the financial markets following the collapse of Silicon Valley Bank: All major cyclically sensitive equity sectors have since underperformed the overall market.
The fact that the global stock market is nevertheless currently in good shape is mainly due to the superior performance of the technology sector. The major tech stocks are seen by market participants as a recession hedge and are in correspondingly strong demand. The leading tech companies have a very high market dominance and can therefore defend their margins better than "normal" companies, even in difficult times. The tech giants also have robust balance sheets. As a rule, they have high liquid reserves and are thus much less dependent on outside capital in the event of an emergency. There is also a speculative aspect: since the launch of ChatGPT, the market has started to price in a new AI-based industrial revolution. This speculative phenomenon was once again fueled by the positive outlook from chipmaker NVIDIA.
In the current market environment, professional investors face a complex trade-off. The overall market's dependence on a few stocks is likely to continue as long as investors actively demand the associated recession hedge. Excessive deviation from the benchmark is therefore associated with above-average performance risks and should be avoided. On the other hand, only selective active positioning, for example in defensive market segments, seems sensible for the time being. Overall, a neutral risk exposure is appropriate at present.
Chairman of the Board
D-61348 Bad Homburg