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FERI Markets Update March 2021 - Stock market high: inflation worries dampen sentiment

Bad Homburg, 03/15/2021
by Dr. Eduard Baitinger, FERI
  • US economic stimulus increases inflation risk
  • FED on a difficult tightrope walk
  • Current market environment favours cyclical stocks

The current euphoria on the equity markets has been dampened for the first time. Improved economic prospects and the associated inflation expectations have recently led to a sharp rise in interest rates. Interest rate-induced corrections on the stock markets were the logical consequence. The risk of further setbacks is likely to remain high in the coming months. The massive US economic stimulus package of USD 1.9 trillion alone will keep concerns about inflationary price trends and rising interest rates alive. The US Federal Reserve wants to keep this interest rate pressure in check and faces a mammoth task in the coming months: despite increasing inflation risks, the Fed must convince market participants that it will continue to pursue its ultra-expansive monetary policy. On the other hand, however, the markets must be cautiously prepared for possible monetary policy restrictions starting as early as 2022. The Fed must succeed in this "balancing act" without triggering another interest rate shock on the financial markets.

High valuation level as a risk

Rising interest rates are not critical from an equity market perspective as long as they are based on improved fundamentals and thus higher earnings expectations. In this case, the negative valuation effect is offset by the positive fundamental effect. If, on the other hand, interest rates rise very quickly, as has happened recently, the negative valuation effect will predominate and there will be noticeable corrections. The highly valued segments of the equity market are then particularly affected. Earnings expectations there have already reached the upper end, so the negative interest rate effect has a particularly strong impact. However, since the central banks have been generously supplying the markets with liquidity since the Corona crash, the proportion of highly valued equities has risen significantly. As a result, the equity market as a whole has become more vulnerable should interest rates continue to rise.

Cyclical stocks preferred

One way out of this dilemma is to pick relative winners in the stock market. Cyclically sensitive sectors continue to be relatively more cheaply valued than the market as a whole and benefit disproportionately from the economic recovery. These stocks are therefore less vulnerable to rising interest rates. Financials even benefit directly from steeper yield curves, as their interest margins rise in such a scenario. Defensive sectors, on the other hand, which are largely non-cyclical in their corporate earnings, and highly valued technology stocks are the losers in the current environment and should therefore tend to be underweighted.


About Dr. Eduard Baitinger

Dr. Eduard Baitinger has been Head of Asset Allocation in the FERI Group since 2015. He is responsible for quantitative asset allocation at FERI Trust, where he also manages and coordinates numerous research projects. In close coordination with the FERI Board of Directors and Chief Investment Officer, Dr. Heinz-Werner Rapp, he also represents the investment strategy of the FERI Group and its communication to clients and customers of FERI.

Before joining FERI, he was a research assistant at the University of Bremen and financial analyst for an asset manager. In 2010 he completed his studies at the University of Bremen, accompanied by a stay abroad in New York, as a graduate economist. In 2014, Eduard Baitinger received his doctorate with distinction on new approaches to quantitative asset management. Dr. Baitinger publishes regularly in academic journals and acts as academic reviewer.


About FERI

Founded in 1987 and headquartered in Bad Homburg, Germany, the FERI Group has developed into one of the leading investment houses in the German-speaking area. FERI offers tailor-made solutions for institutional investors, family assets and trusts in the following areas:  

The FERI Cognitive Finance Institute was formed in 2016. It is the strategic research centre and creative think tank of the FERI Group. The Institute focuses on innovative analyses and the development of methods for long-term oriented economic and capital market research. 

FERI and MLP currently manage assets of EUR 42.7 billion, including EUR 9 billion in alternative investments. The FERI Group is headquartered in Bad Homburg and has offices in Dusseldorf, Hamburg, Luxembourg, Munich, Vienna and Zurich.



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Katja Liese

Member of the Management Board

Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192

F +49 (0) 6172 916-1192

presse@feri.de

FERI AG

Rathausplatz 8-10

D-61348 Bad Homburg

Dr. Eduard Baitinger
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Katja Liese
Member of the Management Board
Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192
F +49 (0) 6172 916-1192
presse@feri.de

FERI AG
Rathausplatz 8-10
D-61348 Bad Homburg

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Katja Liese
Member of the Management Board
Corporate Strategy, Marketing and Communications

T +49 (0) 6172 916-3192
F +49 (0) 6172 916-1192
presse@feri.de

FERI AG
Rathausplatz 8-10
D-61348 Bad Homburg

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