Deutsche Bank Sees Deeper Selloff in U.S. Stocks, Boosts China Call

(Bloomberg) -- Deutsche Bank AG is betting the diverging policy paths between the Federal Reserve and the People’s Bank of China will result in U.S. equities correcting further and China’s getting a boost, joining several other Wall Street banks in making the call.   

The German lender’s international private banking unit downgraded U.S. equities to neutral from overweight last week, scrapping optimism it held since November 2020. Worries over steep valuations and market jitters on the pace of the Fed’s rate hikes were behind the move, Jason Liu, head of the Asia chief investment office, said in an interview Monday.  

Meanwhile, the bank raised Asia ex-Japan equities -- including China A-shares and H-shares -- to overweight from neutral for the first time since July, on prospects that the PBOC’s easing will benefit the domestic economy.   

Deutsche Bank’s views echo that of Goldman Sachs Group Inc. and HSBC Holdings Plc, whose strategists have also been calling for diversification out of U.S. stocks.  

U.S. markets have seen wild swings recently as investors braced for a hawkish Fed, with the Nasdaq 100 plunging into correction territory last week. Shares stateside could correct further in the near term “because the market is pricing in a lot of Fed rate hikes this year and the move was quick for Treasury yields,” Liu said. 

Deutsche Bank expects concerns to ease in the second half as inflation moderates, projecting the S&P 500 Index to hit 5,000 points by end-2022, or a 13% gain from Monday’s close, as the bank sees better-than-expected earnings and a 4% growth in the economy to offer support.   

On China, Liu said it’s “time to do some early positioning for its recovery,” especially after the central bank cut a key interest rate earlier this month. He favors names in China’s high-tech manufacturing, health care and some consumer stocks.  

The PBOC has taken a series of easing steps in recent weeks, cutting policy loan rates and encouraging banks to accelerate lending. Still, China’s benchmark CSI 300 Index has started the year with losses, albeit less than many other Asian markets.

©2022 Bloomberg L.P.