In the second half of this year, investors in the financial markets will likely witness a phenomenon they had almost forgotten, according to Stefan Kreuzkamp, Chief Investment Officer at Deutsche Asset Management (Deutsche AM).
“Inflation will pick up again. Deflationary fears have all but disappeared. The lowest point is behind us and there will soon be a one before the decimal point,” he said on Thursday in Frankfurt.
In the second half of the year, Kreuzkamp expects to see moderate economic growth, rising interest rates in the US and stabilizing commodity prices. Policies pursued by the major central banks will remain ultra-expansive, although there will be increasing evidence of the repercussions in the shape of major volatility on the financial markets, for example.
“To identify returns, these days investors have to be prepared to accept a degree of risk and take a short-term tactical view. The interest rate we have regarded as normal for generations just does not exist any more,” Kreuzkamp notes.
Current returns offered on the fixed income market are at an historic low. Just recently, returns offered by ten-year German Federal Bonds tipped below zero. In fact, at present 79 per cent of German Federal Bonds are in negative territory while for Swiss papers the figure is in reality 91 per cent. Existing European sovereign bonds totaling some 8 trillion euro carry a negative return. If inflation increases as expected, the situation will be exacerbated for cautious investors in particular as their already meager returns from the bond market will be wiped out by inflation, Kreuzkamp warns.
According to Bill Chepolis, Head Fixed Income for the EMEA Region, there are still investment opportunities in the fixed income sector in investment grade as well as in the high-yield arena. Chepolis also considers selected sovereign bonds from the European periphery to be promising. On the currency markets, he anticipates further appreciation of the US dollar – even if parity will not be reached. Deutsche AM Equity Strategist Thomas Bucher sees upward potential in the equity markets. During the second half of the year, corporate profits are expected to increase, while valuations are quite attractive in a historical context after recent setbacks. He advises safety-conscious investors to pay more attention to the issue of dividends.
In addition to inflation and the repercussions of central bank policy, Chief Investment Officer Kreuzkamp lists four other factors that are set to have a major influence on the markets over coming months. These are: the increasing level of debt carried by Chinese companies, oil price developments, the inconsistent performance of Emerging Markets and, most importantly, heightened political risks – such as the resurgence of nationalism, protectionism as well as the Brexit decision.
Despite these risks, Deutsche AM expects to see moderate growth in the global economy of 3.3 per cent. In the US and Eurozone there is every sign of recovery, while in China – where Deutsche AM believes growth of 6.3 per cent is possible – development seems to be stabilizing. The investment strategists predict growth of 1.6 per cent in the Eurozone, with the US economy achieving growth of 1.8 per cent. Combined with the fact that employment figures have on average been solid over recent months, this leaves the Federal Reserve under pressure to act. Deutsche AM expects to see the Fed make two further moves on interest rates by the end of March 2017.
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