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In terms of sectors, portfolios should be broadly diversified, in his opinion: “We see further potential for growth companies, for example from the technology, communications and consumer discretionary sectors. Our focus is primarily on quality growth companies that generate profits. At the same time, other parts of the market could catch up if investors bet on a broader economic recovery in the medium term.” In Europe, Bergos has recently upgraded the industrial sector to an overweight. “This sector is benefiting from, among other things, the EU’s Net Zero Industry Act and regulations that will accelerate the transition to renewable energy,” Carstensen explained

Equity investors seem to have become used to rising interest rates

“Although issues such as the US banking crisis, Credit Suisse and the US debt ceiling debate have also moved equity markets in recent months, the key influencing factors that are causing the greatest uncertainty this year are interest rates and inflation,” Carstensen said. Core inflation remains high in the United States and the US central bank has adopted a hawkish tone of late. Contrary to expectations, interest rates may not yet have peaked, given that a further hike is likely in the summer. The higher interest rates rise, and the longer they stay high, the likelier it is that economies eventually succumb to a meaningful slowdown.

Recent market performance suggests that investors have made their peace with the current situation considering that equity markets have rallied despite rising interest rates. “The US equity market has not seen a setback of more than 3 percent since early March. And the volatility index, the VIX, is at a very low level. This begs the question of whether market participants have become overly complacent with respect to interest rate and economic trends,” Carstensen said. He regards the improved investor sentiment in the last few weeks as a contrarian indicator that calls for caution.

Time for a rebalancing

From a valuation perspective, equities have become less attractive. Share prices have risen, but earnings growth expectations are low. Consequently, PE ratios are now higher, meaning that equities have become more expensive. They have also become less attractive in comparison with bonds. The yield gap – defined as the earnings yield of equities minus the yield of 10-year government bonds – has fallen below its long-term average.

“Nevertheless, we still see further upside potential in the second half of the year, even if this is likely to be limited due to the already significant price gains in recent months,” Carstensen said. He considers systematic investment strategies, which are still underinvested in equities but are forced to enter if volatility remains low, as a positive price driver. If, in addition, there are increasing signs that central banks are considering interest rate cuts and corporate earnings turn out better than expected, there may even be upside surprise potential in the markets. Against this background, equities are neutrally weighted in the Bergos portfolio. Carstensen: “After the strong share price gains in part, it is time for a rebalancing, taking profits from stocks that performed particularly well and returning these stocks to the target weighting.”

Regions and sectors: USA, Japan, and European industrials

In terms of regions, Bergos maintains an overweight position in Japan and the US in the global equity portfolio. “In Japan, inflation is comparatively low and monetary policy is still expansive. This is supporting the equity markets. Valuations are attractive and net inflows to the Japanese market are picking up again,” Carstensen explained. He sees greater opportunities in the United States than in Europe, which is neutrally weighted: “The interest rate cycle has progressed further in the United States. A central bank pivot could well happen earlier there. Growth stocks in particular usually stand to benefit from the prospect of interest rate cuts.”

Bergos remains cautious with regard to emerging markets and especially China. “Here we see geopolitical risks: The tensions between China and the United States could escalate in the run-up to the US presidential election next year. That is likely to weigh on earnings and growth in China”, Carstensen explained.

In terms of sectors, portfolios should be broadly diversified, in his opinion: “We see further potential for growth companies, for example from the technology, communications and consumer discretionary sectors. Our focus is primarily on quality growth companies that generate profits. At the same time, other parts of the market could catch up if investors bet on a broader economic recovery in the medium term.” In Europe, Bergos has recently upgraded the industrial sector to an overweight. “This sector is benefiting from, among other things, the EU’s Net Zero Industry Act and regulations that will accelerate the transition to renewable energy,” Carstensen explained.

WHAT IS THEMATIC INVESTING?

New long-term trends are transforming the global economy. Thematic investing is about finding companies that are set to benefit from a global structural change backed by the Megatrends, which we believe will drive outperformance compared to global equities in the long-run. Moreover, thematic investing seeks to align asset selection with certain economic, political, and social themes prevalent in modern society. In order to represent a long-term component in the portfolio, we seek to capture the arising opportunities across sectors and geographies.

_{This publication is for information and marketing purposes only. The provided information is not legally binding and neither constitutes a financial analysis, nor a sales prospectus, an offer for investment-transactions, an asset management mandate or an investment idea and does not substitute any legal, tax or financial advice. Bergos AG (hereinafter “Bergos”) reserves the right to amend the range of services, products and prices at any time without notice. Bergos does not accept any liability for the accuracy, correctness or completeness of the information. Bergos excludes any liability whatsoever with regard to future-related statements mentioned in this publication or any other statements pertaining to returns, capital gains or any other asset increases. This publication has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The investment proposals and investment ideas mentioned in this publication have not been adapted to your personal circumstances. Investment decisions should only be made based on your portfolio and should consider your personal situation, as well as the risk appetite and risk tolerance. Since investment proposals and investment ideas show different risk characteristics, we are asking you to read the brochure “Special Risk in Securities Trading” and to contact your relationship manager for further questions. It is possible that Bergos itself or its directors or employees had invested in the past, are investing or plan to invest in the future in those instruments, on which this document contains information or opinions. It is also possible that Bergos performed services for issuers of such investment instruments in the past, still provides them or will provide them in the future. It cannot be ruled out that employees or directors of Bergos worked for example as directors for the issuers of such investment instruments, still work there or will work there in the future. Bergos itself or its directors or employees could therefore have an interest in the future performance of investment instruments. The information is intended solely for the use of the recipient and shall not be passed on to any third party. The reproduction in part or in full without prior written permission of Bergos is not permitted.}

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