Despite current tension between the USA and China, DWS does not expect to see trade disputes escalate and therefore anticipates that the global economy will continue to grow over the coming twelve months. “So far the markets have only priced in trade disputes and not a trade war. And we agree with this view”, explained Chief Investment Officer Stefan Kreuzkamp in the asset manager’s capital market outlook published in Frankfurt. In historical terms, trade disputes tend to be temporary, they are waged bilaterally and generally shave around 25 basis points off global gross domestic product.
By contrast, if a trade war turns multilateral and is waged by numerous countries this will result in 125 to 150 basis points being shed from gross domestic product. “At the end of the day, this would see the WTO system collapse and many current prognoses would be invalid”, elaborated Kreuzkamp. Looking at future developments in Italy he commented that although DWS expected Italy’s creditworthiness to be downgraded, he did not think this would mean the country would necessarily lose its investment grade status.
In light of all of these factors, Kreuzkamp predicts that 2019 will be the tenth year in succession with synchronized growth across all regions in the global economy, which will be 3.9% on average. In the USA he expects growth of 2.4% driven by fiscal stimuli and Eurozone growth of 1.9%. In China the economy will grow by 6.3%, while the country’s business model will continue to shift from production to consumption. “Admittedly we are in a late economic cycle, but there is no sign of recession”, was his conclusion.
At the same time, inflation will pick up only slightly. In the United States globalization, digitalization and wage-demand restraint by crisis-hardened employees all meant that average hourly wages increased only slightly. In this context, during 2019 we can expect three further interest rate hikes by the Fed up to 3.0%. Kreuzkamp predicts that the ECB will announce its first interest rate increase since 2011 in the fourth quarter of next year.
“The fat years are over”, said Bill Chepolis, Head Fixed Income EMEA at DWS. However there are still interesting securities apart from sovereign bonds issued by many industrialized nations. In this context for example, floating rate notes can offer attractive investment opportunities. In addition, the Greenback has potential, at least for a period, to reach the 1.10 level against the euro, which is why investors should consider unhedged Dollar instruments. Chepolis also suggests emerging market bonds that remain attractive even if hedged. “Having said that, investors should consider whether the economy of that emerging market country depends on a single commodity”, he said.
Thomas Schüssler, Co-Head Equities, emphasized that stock prices still have further potential, although the zenith of profits growth has been surpassed especially in the USA. Expectations of profits growth of around 7% to 8% remain and should be sufficient to drive prices still higher. Additional support in the USA will come from equity buy-back programs financed by repatriated foreign corporate profits. His favorites are US technology stocks. “These equities have driven US stock markets and the trend of outperforming growth stocks is set to continue. We are no longer talking about the Dotcoms of the early 2000s, but rather global winners with extensive and free cash flows”, Schüssler explained. Similarly, US financial stocks should benefit from increasing interest rates.
Christian Hille, Global Head Multi Asset, believes the return of volatility over the coming twelve months will become a characteristic of the capital markets. Last year the S&P 500 Index added or shed in excess of 1% on only eight trading days. “This year the picture has shifted fundamentally“, according to Hille. As a result, action must be more tactical. In terms of asset allocation, the commodities sector is interesting in such a late phase of the cycle. “Fundamental data in the oil market indicate a sustained price recovery, that will be carried by a strong momentum in the global economy, limited reserve capacities and heightened geopolitical risks”, said Hille. In addition, history shows that commodities in a late-cycle scenario of rising interest rates may tend to perform better than equities and bonds.
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