Global Strategy Q3 2019
We expect no quick solutions to the trade dispute and Brexit and volatility in financial markets should remain high due to uncertainty over the growth outlook. Central banks are becoming more cautious and are holding out the prospect of easing monetary policy should it become necessary. While this benefits risk assets, safe haven assets offer negligible yields. We therefore favor stocks in defensive sectors as well as BB-rated HY bonds and IG hybrid bonds.
Economic Outlook: The US economy is currently growing slightly above its long term average (2019e: +2.5%; 2020e: +2.1% y/y), contrary to budding concerns over the trade dispute. We believe that the trade dispute will be resolved and hence do not expect a sustained economic downturn in the US. The labor market is in excellent shape, while the trend momentum of inflation leaves something to be desired. The slowdown in global trade and the associated weakness in exports weigh on the growth prospects of the euro zone, while domestic demand remains supportive. We have nevertheless reduced our GDP growth forecasts for 2019 (+1.1% y/y) and 2020 (+1.0% y/y) further - not least in view of the growing likelihood of a “hard Brexit”. The pace of inflation is currently falling short of expectations. We expect headline inflation of 1.4% in the euro zone this year.
Bonds: The breakdown of trade negotiations between the US and China in early May weighs on the outlook for global economic growth and central banks have become more cautious as a result. We expect tensions between the US and China to ease and US economic growth to remain solid, therefore we are not forecasting any US rate cuts for the remainder of the year, even though this forecast is subject to considerable risk. Our scenario implies that yields on US treasuries will increase. We expect no further monetary policy measures to be implemented in the euro zone, as this would not be justified by the current environment. Easing tensions between the US and China on the one hand, and escalating tensions between the EU and the UK on the other, overall suggest to us that yields on German Bunds will remain depressed. We believe there is little potential for spreads on corporate bonds to tighten further and continue to recommend the IG hybrid and BB-rated segments.
Currencies: We expect the US dollar to strengthen in coming months. Only when the situation eases once Brexit has passed, i.e., after October 31, should the euro regain some ground. Given this environment, the Swiss franc should appreciate in Q3/Q4 and only weaken somewhat in the course of H1 2020. The gold price should rise moderately in the near term.
Stocks: In light of weakening global growth momentum and political risks – particularly in connection with the unresolved trade dispute – stock market volatility should increase. Non-cyclical sectors are expected to outperform cyclical sectors. We expect global stock market indexes to post a moderate gain at the lower end of a range from 0% to +5% in the third quarter.