Reinhard Panse's Perspectives
Reinhard Panse's Perspectives
Podcast
31.5.2024
Historically, interest rates on 2-year government bonds have always been a good indicator of the course of money market interest rates, which are set by the central banks. If the former rose, the latter followed suit and vice versa. Currently, the 2-year interest rates in both Germany and the USA have been falling for months, which suggests that the central banks will soon follow this trend. This expectation is also supported by the high probability of recession and the leading indicators for economic development in various industrialized countries and China.
However, although the US Federal Reserve's recession forecast model has been showing clear indications of an impending recession in America since January 2023 and the Leading Economic Indicator (LEI) of The Conference Board, a forecasting institute founded in 1916, has not yet materialized. The reason for this is the US government's high level of new debt, which is currently causing a delay.
The US stock market is also behaving unusually. While it previously moved in parallel with the LEI (with the exception of the 1974 oil crisis), since September 2022 it has tended to rise in contrast to the LEI's falling value, which can be partly explained by the euphoria for large technology stocks. There was no corresponding upward movement for smaller stock corporations. Should the expected fall in interest rates materialize, they are the ones likely to benefit more.
In Europe, the business climate indicator calculated by the European Commission provides a suitable early indicator of an impending recession. Similar to the USA, it is also on a downward trend, meaning that smaller companies should be able to withstand an interest rate cut and recession better than larger ones - especially as the recent upturn in share prices of the latter cannot be explained by comparable euphoria.
In Germany, the LEI calculated by the OECD has also been falling for over 60 years, but larger companies here have not ignored it with above-average share price performance. A recession should therefore come as no surprise to investors. An interest rate cut, which is likely in the event of a recession, should therefore help them as well as small caps.
In the UK, the LEI has even risen significantly recently, while share prices have underperformed. This means that the stock market there should currently be subject to few risks and benefit from interest rate cuts.
The picture is different in Japan, where shares and interest rates have been positively correlated for 35 years. There, falling interest rates were previously seen as a sign of a weakening economy, meaning that investors were more motivated to buy as a result of their rise.
China's LEI has been on a consistent downward trend since February 2022. The country is facing major problems and will hardly be able to maintain its role as the driving force behind the global economy. Some support from the government and central banks will be needed to overcome the weak phase in equities.
Reinhard Panse's Perspectives
31.5.2024
Reinhard Panse
The stock markets of the major industrialized countries are currently close to their record prices and investors are hoping for interest rate cuts and the absence of a recession. But how likely is this scenario? And how will shares react to changes in interest rates or a worsening economy?
Historically, interest rates on 2-year government bonds have always been a good indicator of the course of money market interest rates, which are set by the central banks. If the former rose, the latter followed suit and vice versa. Currently, the 2-year interest rates in both Germany and the USA have been falling for months, which suggests that the central banks will soon follow this trend. This expectation is also supported by the high probability of recession and the leading indicators for economic development in various industrialized countries and China.
However, although the US Federal Reserve's recession forecast model has been showing clear indications of an impending recession in America since January 2023 and the Leading Economic Indicator (LEI) of The Conference Board, a forecasting institute founded in 1916, has not yet materialized. The reason for this is the US government's high level of new debt, which is currently causing a delay.
The US stock market is also behaving unusually. While it previously moved in parallel with the LEI (with the exception of the 1974 oil crisis), since September 2022 it has tended to rise in contrast to the LEI's falling value, which can be partly explained by the euphoria for large technology stocks. There was no corresponding upward movement for smaller stock corporations. Should the expected fall in interest rates materialize, they are the ones likely to benefit more.
In Europe, the business climate indicator calculated by the European Commission provides a suitable early indicator of an impending recession. Similar to the USA, it is also on a downward trend, meaning that smaller companies should be able to withstand an interest rate cut and recession better than larger ones - especially as the recent upturn in share prices of the latter cannot be explained by comparable euphoria.
In Germany, the LEI calculated by the OECD has also been falling for over 60 years, but larger companies here have not ignored it with above-average share price performance. A recession should therefore come as no surprise to investors. An interest rate cut, which is likely in the event of a recession, should therefore help them as well as small caps.
In the UK, the LEI has even risen significantly recently, while share prices have underperformed. This means that the stock market there should currently be subject to few risks and benefit from interest rate cuts.
The picture is different in Japan, where shares and interest rates have been positively correlated for 35 years. There, falling interest rates were previously seen as a sign of a weakening economy, meaning that investors were more motivated to buy as a result of their rise.
China's LEI has been on a consistent downward trend since February 2022. The country is facing major problems and will hardly be able to maintain its role as the driving force behind the global economy. Some support from the government and central banks will be needed to overcome the weak phase in equities.
About the author
Reinhard Panse
Reinhard Panse is Chief Investment Officer and co-founder of FINVIA Family Office GmbH. Until February 2020, Reinhard Panse was a member of the Management Board and Chief Investment Officer for HQ Trust GmbH, which is owned by the Harald Quandt family. From 2004 until joining HQ Trust GmbH in 2011, Reinhard Panse was Chief Investment Officer of the UBS Sauerborn business unit created within UBS Deutschland AG. From 2001, Reinhard Panse was a member of the Management Board of Sauerborn Trust AG and its legal predecessors. He was responsible for the investment strategy and played a leading role in the holistic asset management and administration of large private assets. Reinhard Panse began his career by taking over capital market and client support activities at Feri GmbH in 1989, after having founded and managed his own wealth management as managing director.
