Global Strategy Q4 2019
Political risks and the associated ongoing uncertainties are weighing on the global growth outlook, and central banks have reacted by easing monetary policy further. Financial market volatility should remain high this environment. Growth in corporate profits is lending support to stock markets, and we continue to favor defensive sectors. In bond markets we recommend IG hybrid bonds in defensive sectors as well as BB-rated HY bonds.
Economic Outlook: The trade war and the associated uncertainty are weighing on the economic outlook in the US. We nevertheless expect US GDP growth to remain close to the potential growth rate (2019e: +2.2%; 2020e: +1.8%). Labor market conditions are strong and inflation remains slightly below the Fed's target. In view of the persistent political chaos prevailing in the United Kingdom, we continue to expect a hard Brexit at the end of October 2019. We believe this short term shock will trigger slightly negative GDP growth in the euro zone in Q4 2019 (-0.2% q/q), with stronger growth of +0.4% per quarter resuming from Q2 2020 onward. Overall, we are forecasting GDP growth of 1.1% for the euro zone in 2019, followed by +1.0% in 2020. Price pressures in the euro zone remain too weak, and are keeping the inflation rate significantly below the level targeted by the ECB.
Bonds: Political crises are generating persistent uncertainty and are weighing on the global economic outlook. Both the Federal Reserve and the ECB have responded by easing monetary policy further. We expect one more rate cut in the US this year. By the end of the year yields on US treasuries should be at slightly higher levels than recently, as market tensions should ease after Brexit. The ECB has cut interest rates further in September and announced that it would provide additional liquidity. We expect one more cut in the deposit facility rate to -0.6% this year. This expectation is contingent on a hard Brexit in line with our forecast. Thereafter, we expect only a mild correction in government bonds, as a stuttering economy and the expansionary policy of the ECB will continue to support bond prices. Thus we continue to recommend IG hybrid bonds (in defensive sectors) and bonds in the BB rating class, the highest credit quality level within the speculative grade (high yield) segment.
Currencies: Due to the threat of an impending hard Brexit, we recommend maintaining exposure to the US dollar – the classic safe haven currency - and adopting a wait-and-see stance for the time being. The Swiss franc could potentially still appreciate against the euro as well. Only after the United Kingdom's exit should the situation ease and the euro regain a little ground. The gold price should only advance moderately in Q4, in a range from approximately USD 1,500 to 1,540.
Equities: As a result of the weaker growth outlook and ongoing political risks we expected high stock market volatility to persist. Rising corporate earnings estimates and expansionary monetary policy by central banks are lending support to stock markets. We prefer defensive to cyclical sectors in this environment and expect global stock indexes to post moderate gains in the fourth quarter, at the lower end of a range from 0% to +5%.