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Markets Update July 2021 – Equity markets take a breath

Bad Homburg, 7/20/2021
by Dr. Eduard Baitinger
  • Slowing momentum but no trend reversal on the markets
  • Falling long-term interest rates boost technology stocks
  • Cyclical equities could make up ground in the second half of the year

The mid-term results of the global equity markets is quite respectable. Following the rapid recovery from the Corona crash in 2020, the stock markets recorded price gains in the first half of 2021. However, the brilliant recovery has used up energy and it is not to be expected that the markets will continue to develop with the same momentum in the coming months. Empirically speaking, returns in the second half of the year are always lower after a very good first half. Since the equity markets have risen very sharply since the Corona low - the MSCI World in Euro terms has risen by over 75 percent - slower gains are therefore to be expected. On the other hand, the risk of sustained corrections or even a bear market is low. This assessment is supported by an analysis of the fundamental data: Both the global economy and corporate profits are far from recessionary tendencies, despite slowing momentum.

Markets Resist Corona Fears

With the end of Corona restrictions in many countries, the issue is no longer as dominant in the markets as it has been in recent months. Nevertheless, some uncertainty remains about the further course of the virus pandemic, mainly due to the spread of the highly contagious delta variant. Accordingly, the stock markets reacted unevenly. While cyclically sensitive stocks declined, those that are among the so-called pandemic winners were able to gain. Large technology stocks were particularly in demand. The rise in prices in this sector was additionally boosted by falling long-term interest rates. Since technology stocks dominate the market with their high capitalisation, the stock markets have developed in a friendly manner overall. Investors who follow the benchmark were able to benefit from this in recent weeks. Investors who were overweight in cyclical segments, on the other hand, lost out. On the bond markets, prices were driven disproportionately by lower long-term interest rates.

No Hasty Write Off for Cyclical Equities 

Despite the relative weakness of cyclical equities, there are justified hopes of a turnaround for this segment in the course of the year. For one thing, the vaccination rate of the population - especially in the industrialised countries - is significantly higher than it was before the Corona wave in autumn 2020. For another, the global economy could still provide positive surprises. There are signs that China could loosen its monetary policy reins again in the second half of the year. This would be a positive signal for the global economy. In addition, the US labor market is recovering in great strides, which raises hopes of a significant increase in new jobs in the late summer. If this were to happen, it would provide fresh impetus for the cyclically sensitive sector of the equity market. Against this backdrop, professional investors should reduce the weighting of cyclical equities in their portfolios and wait for better times to enter the market.

About Dr. Eduard Baitinger

Dr. Eduard Baitinger has been Head of Asset Allocation at FERI AG since 2015. Under the overall responsibility of the CIO of the FERI Group, Dr. Marcel V. Lähn, Dr. Baitinger is responsible for quantitative asset allocation in the CIO Office and various publications on the assessment of the international financial markets.

Before joining FERI, Dr. Baitinger was a research assistant at the University of Bremen and a financial analyst at an asset manager. In 2010, he completed his studies at the University of Bremen with a degree in economics, accompanied by a stay abroad in New York. In 2014, Eduard Baitinger completed his doctorate with distinction on new approaches to quantitative asset management. Dr. Baitinger publishes regularly in academic journals and acts as an 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 48.2 billion, including EUR 12.2 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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Marcel Renné

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D-61348 Bad Homburg

Dr. Eduard Baitinger