Global Strategy Q4 2018
The economic expansion still remains solid, but faces downside risks due to political uncertainties. The Fed is going to continue to implement gradual rate hikes, while the ECB will maintain its accommodative monetary policy stance. Bond yields should largely remain stable in Q4 and only rise moderately again in 2019. Continued strong fundamental data lend support to equity markets as well as IG hybrid and HY corporate bonds.
Economy: The US economy should grow by a respectable +2.9% y/y this year, primarily driven by tax cuts and higher public spending. The potential negative impact of president Trump's trade policy should remain negligible for now. We believe US inflation will remain stable in this environment. In the euro area we expect GDP growth to stabilize in the second half of the year, even though the simmering trade dispute, the possibility of a “hard” Brexit without a negotiated agreement, and the deterioration in sentiment toward emerging markets represent downside risks for the growth outlook. We expect GDP growth of 2.1% in 2018, which exceeds the potential growth of the euro zone economy significantly. Inflation should improve slightly to +1.7%; the first signs of accelerating wage growth are encouraging in this respect.
Bonds: The ECB has set a road map for monetary policy well into 2019, contingent on incoming data. Net asset purchases are to be discontinued by the end of 2018 and interest rates are to remain at current levels at least through the summer of 2019. Reinvestment of the proceeds from maturing bonds in the ECB's portfolio will exert an effect on bond markets for some time to come. The plethora of political uncertainties is unlikely to be resolved in its entirety until the end of the year, and in conjunction with muted interest rate expectations, bond yields should remain stable for the remainder of the year. We expect moderate increases in yields to resume in 2019 at the earliest. In the US we are forecasting one more rate hike this year, followed by a further three rate hikes in the coming year. Political trouble spots should continue to support US treasuries this fall. However, in light of the strong economy, we expect the uptrend in treasury yields to resume next year. After the strong performance of HY bonds and IG hybrid bonds in Q3 we expect more muted returns in Q4.
Currencies: The expected trend in interest rates in the two major currency areas as well as political imponderables are lending support to the US dollar, which should gain ground against the euro until the end of the year. In view of all the political trouble spots we expect the Swiss franc to stabilize against the euro around the 1.14 level in Q4. As fundamental and technical drivers of the gold price are offsetting each other, we expect a sideways move in Q4.
Stocks: As a result of heightened uncertainty in the face of trade disputes, the stock market indexes of developed countries (particularly US equities) should outperform those of emerging markets. We are forecasting an advance in global stock market indexes ranging from 0% to +5% in Q4, amid continued volatility.