DWS expects strong recovery after massive slump

Even though the number of new coronavirus infections is still alarmingly high, DWS looks ahead to 2021 with great optimism, both with regard to the development of the real economy and the opportunities on the capital markets. Stefan Kreuzkamp, Chief Investment Officer (CIO) of DWS, summarized the conditions for this positive outlook at the asset manager's annual outlook on Wednesday: "The decisive factor will be that the expectations directed at the effectiveness of the Covid-19 vaccination and its rapid introduction are fulfilled. For the vaccination this means that it has to be successfully carried out on a large scale throughout the country by the end of the third quarter 2021 at the latest. "Markets have priced in this optimistic scenario, and there is no great tolerance for error," said Kreuzkamp.

If these assumptions materialize, an extremely rapid economic recovery can be expected. "We have already seen this year how quickly the economy has picked up again following the very strong slump in the second quarter, after the restrictions were eased", Kreuzkamp said. "We expect the gross domestic product (GDP) of the euro zone to return to its pre-crisis level as early as the end of 2022. This is extremely fast compared to the development after the great financial crisis, when the return took almost seven years.

DWS sees global economic growth at 5.2 percent in 2021 and 5.5 percent in the euro zone. The upturn will be particularly strong in China. Kreuzkamp expects growth of 8.2 percent there next year.

Overall, Kreuzkamp assessed the situation in the USA after the presidential election as positive. Because power would probably be more balanced than many observers assumed before the election – the democratic landslide victory did not happen – radical changes in economic policy are not very likely. Global trade in particular is likely to benefit from more predictability in future U.S. policy, according to Kreuzkamp. Massive tax increases, which would burden the profitability of companies, have become less likely with the election results. A higher priority of investments in the environment and climate protection and the re-entry into the Paris Climate Agreement should have a positive effect. Nevertheless, uncertainty remains high, as it will take until January to clarify the majorities in the US Senate.

As far as the monetary policy of the central banks is concerned, Kreuzkamp sees no fundamental change in the coming year. "Interest rates will remain at an extremely low level. But we do not see further interest rate cuts. The zero interest rate policy will continue into 2023, as will the central banks' bond purchase programs. This applies to both the USA and Europe.

According to Kreuzkamp, a significant increase in inflation is not in sight in the coming year. However, some movement could come into consumer prices in the following years. Then increased demand could meet with a still somewhat limited supply and prices could rise. That is however quite accepted by the central banks in view of the strongly risen national indebtedness, so Kreuzkamp. The CIO expects it to take between eleven and fourteen years before the level of debt can be reduced to pre-crisis levels in Italy, for example. However, Kreuzkamp expressly emphasized that it is very unlikely that the country will follow the same development as Greece.

According to Kreuzkamp, the prospects for fixed income have not changed fundamentally in recent months. Anyone who wants returns has to look beyond government bonds, he said. Depending on the type and region, yields of between two and four percent can be achieved with corporate bonds. Corporate bonds from the Asian emerging markets, whose issuers have come through the crisis much better than many of their Latin American counterparts, seem particularly promising to Kreuzkamp. In contrast, the yield prospects for government bonds remained depressed around the globe. Realistic expectations for performance here were only 0.5 percent. This does not mean, however, that government bonds are superfluous. They are still extremely important as a means of diversification in a portfolio, as a balancing factor in times of high volatility.

The same applies to the dollar. Since April of this year, the development of the dollar exchange rate has mainly reflected the perception of risk, rather than interest rate differences, which are currently not very pronounced anyway. In times of high uncertainty, the dollar is perceived as an instrument of diversification, whose exchange rate rises when uncertainty is high. This means that the US currency, along with government bonds, is an important component in being able to better manage periods of stress on the stock markets. At the end of 2021, DWS sees the euro-dollar exchange rate at 1.15, and thus expects a slightly stronger dollar.

Regarding stock markets, Kreuzkamp was optimistic about 2021, even though they had been doing exceptionally well recently. A performance in the mid to high single-digit range is possible, he said. On the one hand, equity investors would accept lower risk premiums in view of the lack of alternatives to equity investments, which would justify higher price-earnings ratios. On the other hand since the enterprise profits might rise clearly, the valuations would also decrease, but still remain clearly above their average.

Kreuzkamp does not expect a fundamental favorite change in equity styles. Technology stocks remain promising. A rotation from growth stocks to value stocks is not to be expected, even if price rallies are possible in the short term for value stocks. Kreuzkamp identified shares from the climate technology sector as the clear winners of the crisis. The tightened regulations on the way to CO2 neutrality would change the economy in the long term and open up huge investment opportunities. For example, institutional investors alone have 17 trillion dollars of investment money at their disposal, which should preferably be invested in climate-neutral investments.

For further information please contact:

Sabina Díaz Duque
+49 (0)69 / 910 14177

Reimar Salzmann
+49 (0)69 / 910 14191

About DWS Group
DWS Group (DWS) is one of the world's leading asset managers with EUR 759bn of assets under management (as of 30 September 2020). Building on more than 60 years of experience, it has a reputation for excellence in Germany, Europe, the Americas and Asia. DWS is recognized by clients globally as a trusted source for integrated investment solutions, stability and innovation across a full spectrum of investment disciplines.

We offer individuals and institutions access to our strong investment capabilities across all major asset classes and solutions aligned to growth trends. Our diverse expertise in Active, Passive and Alternatives asset management – as well as our deep environmental, social and governance focus – complement each other when creating targeted solutions for our clients. Our expertise and on-the-ground-knowledge of our economists, research analysts and investment professionals are brought together in one consistent global CIO View, which guides our investment approach strategically.

DWS wants to innovate and shape the future of investing: with approximately 3,400 employees in offices all over the world, we are local while being one global team. We are investors – entrusted to build the best foundation for our clients’ future.


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