DWS is confident about the development of the global economy and capital markets in the coming year. "Although growth will be significantly weaker in some regions, we do not expect a global recession," said Stefan Kreuzkamp, Chief Investment Officer (CIO) at DWS, at the German asset manager's capital market outlook held on Tuesday in Frankfurt. Contributing to this trend is an accommodative monetary policy from central banks and decreasing political uncertainties. Against this background, Kreuzkamp expects the Dax to reach 14,000 points at the end of 2020. The euro will continue to move sideways against the dollar to 1.15, but it is still too early to declare the end of the cycle for the Greenback.
Looking at the trade conflict between the USA and China, Kreuzkamp predicted that a first-phase agreement between the two countries would be reached soon. This would freeze tariffs at the current level and suspend an increase of tariffs on December 15th. "We do not expect a further escalation, as both economies have already suffered severe consequences," said Kreuzkamp. Chinese exports to the USA have already fallen by 53 billion dollars within a year, which was the sharpest decline since the financial crisis. Conversely, exports from the USA to China have fallen by 33 billion dollars. "Regardless of the expected first-phase agreement, the struggle by both countries for global leadership in technology will continue," Kreuzkamp said.
According to Kreuzkamp, the political headwind from Europe will also ease. By the first quarter of next year, he expects an agreement between the EU and Italy on a deficit of 2.2 percent for the 2020 budget and the avoidance of an excessive deficit procedure against the country. Regarding the outcome of the snap elections in the United Kingdom on December 12th, he called the probability of a hung parliament at 60 percent. A hung parliament is where neither a party nor a coalition has an absolute majority. This puts the probability for exiting the Brexit at 45 percent, and the probability for a "soft Brexit" – for example through a customs union or a membership in the European Economic Area – at 15 percent.
Kreuzkamp does not expect a sudden rise in inflation, which is why both the Federal Reserve and the European Central Bank (ECB) could continue their accommodative monetary policy and expand their balance sheets further. "However, we do not see any further interest rate cuts by either central bank, as such steps are unlikely to have any significant impact on the economy. Monetary policy has reached its limits in this respect," Kreuzkamp said. He also ruled out a rate cut to support Donald Trump in the upcoming US presidential elections next year.
In 2020, global economic growth is expected to stagnate at the previous year's level of 3.1 percent. For the USA, Kreuzkamp predicted a slowdown to 1.6 from 2.2 percent. For the euro zone, he predicted a decline to 0.9 from 1.1. "Because of the debt ratio of most countries in the euro zone, we also do not expect effective economic stimulus programs," said Kreuzkamp. Only Germany could afford such measures, but with rising social spending and the partial abolition of the solidarity surcharge, the country was already pursuing an expansive economic policy as seen by its own standards. In China, no "hard landing" is seen, but growth is expected to decline to 5.8 from 6.2 percent. Against this trend, an acceleration of growth to 4.4 from 4.2 percent can be expected in emerging markets, which will account for 60 percent of global gross domestic product in 2020.
"Looking at the bond markets, we expect yields to remain low for longer and that investors will therefore have to take greater risks to generate positive returns," said Kreuzkamp. Risk-adjusted, euro corporate bonds from issuers with investment-grade credit ratings are currently particularly attractive. "These securities are benefiting not only from investors shifting funds into corporate debt because of negative yields on government bonds, but also from demand from the ECB's bond purchase programmes," Kreuzkamp said. Corporate bonds from Asian issuers also benefit from investors' increased appetite for risk, especially as a great deal of downside is already priced into these securities.
On the equity side, Kreuzkamp predicted that prices would be supported by an expected easing in intensity of the trade dispute and by a forecast recovery in corporate earnings growth. For the USA, he predicted a five percent increase in earnings per share for 2020, a six percent increase for Europe and a nine percent increase for emerging markets. The greatest upside potential was also seen for European and emerging markets as equity prices tended to follow earnings growth. Looking at individual sectors, investors should be underweight equities from the real estate and utilities sector, while overweighting securities from the IT and global financial sector. Kreuzkamp cited a slight expected rise in yields as one of the reasons for the recommendation to underweight stocks from the utilities sector that are used by many investors as bond proxies. Climate change also poses a risk to the business models of many companies in this sector.
"However, ten percent of utilities will also benefit from climate change, such as renewable energy providers," added Petra Pflaum, Chief Investment Officer for environmental, social and corporate governance (ESG) and co-head of equities in the EMEA region at DWS. An investment process by which we examine the sustainability of business models on a company by company basis is therefore not only suitable for avoiding risks, but also for exploiting opportunities. Certainly, with certain ESG strategies, such as "ESG best-in-class", the universe of companies available for investment is sometimes significantly reduced. "However, the past has clearly shown that this does not reduce performance or increase volatility," she said. Rather, the ESG information obtained through a sustainability filter could even serve as an early warning system for corporate profits, which is why DWS is increasingly integrating these criteria into its investment process. "We are firmly convinced that sustainability is not a trend that will eventually disappear, but that it is the core of all our actions that will enable us to be successful for our investors in the future," summarized CIO Kreuzkamp.
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About DWS Group
DWS Group (DWS) is one of the world's leading asset managers with EUR 752bn of assets under management (as of 30 September 2019). Building on more than 60 years of experience and a reputation for excellence in Germany and across Europe, DWS has come to be 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 3,600 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.