about 2 years ago • 1 min
As the Federal Reserve (the Fed) prepares to increase interest rates this year, German asset management giant DWS reckons European stocks could be one of the few winners.
Investors currently expect the Fed to start raising its key interest rate as soon as March and follow that with a further three quarter-point hikes by the end of the year. And although the Fed only sets interest rates for the US, their policy choices will still reverberate around the world. That’s because the Fed effectively fixes the return available on a theoretically risk-free investment in US government bonds, against which all other returns are measured.
A report last week from DWS, which manages about $1 trillion, argues that in this environment eurozone stocks will provide the best returns among major asset classes. The chart above shows DWS’s 2022 forecasts for economic growth, inflation, and returns on bonds, stocks, and commodities. It reckons the eurozone’s Stoxx 50 will beat America’s S&P 500, Germany’s DAX, and the UK’s FTSE 100 – not to mention bonds and gold.
Looking at sectors, the asset manager argues financial stocks are likely to benefit from higher interest rates – after all, it allows them to increase the margin between what they receive from borrowers and pay out to savers. But it warns that growth stocks, which are reliant on the promise of future profits, don’t generally perform well.
“Interest rate hikes can actually be good for the stock market, and not just because stocks offer some degree of hedging against inflation,” DWS wrote. “Investors may also be relieved that a central bank which was getting ‘behind the curve’ is now responding – reducing the risk of having to react more strongly later.”
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