- No central bank interest rate hike expected before 2023
- Inflation likely to increase, but only moderately
- Diversification: Alternative investments substitute government bonds
Stefan Kreuzkamp, Chief Investment Officer at DWS group, identified three trends for the financial markets at the asset manager's mid-year market outlook on Monday. First, central banks will continue to keep interest rates low. Kreuzkamp: "We don't expect interest rates to change before 2023, neither in the U.S. nor in Europe." Secondly, Emerging Market Asia, which has managed the Covid-19 pandemic particularly well, is likely to be among the most promising investment regions. Third, sustainability is the big winner of our time. Countries pressed the gas pedal on the timetable to achieve net-zero emissions. The implications for investors are also huge. "The risk-return ratio turns out better when sustainability criteria are met," says Kreuzkamp.
On the development of the Covid-19 pandemic, portfolio manager and biotechnology expert Noushin Irani expressed optimism. The enormously rapid development of the novel mRNA vaccines gives hope for successful application in other areas such as cancer therapy, she said.
Growth gap between the U.S. and Europe widens
What impact has Covid-19 had so far? What will the world look like after the pandemic? The growth gap between the U.S. and Europe has widened. Kreuzkamp expects 6.7 percent economic growth in 2021 for the U.S., thanks to enormous government support and rapid progress in vaccination. He also sees growth of 5.2 percent in 2022. The euro zone cannot quite keep up, he adds. Here, the growth forecasts are 4.2 percent for 2021 and 4.6 percent for 2022. The emerging markets are likely to be on a par with the U.S. in terms of expected growth, with Kreuzkamp predicting growth of 6.2 percent in 2021 and 4.7 percent in 2022.
On the subject of inflation, Kreuzkamp gave the all-clear – at least in part. "Inflationary pressure is likely to peak in the current year," the CIO said. Then the effect of pent-up demand, which is driving up prices, should subside. Supply bottlenecks should then also be a thing of the past and not lead to any significant price pressure. In the longer term, however, inflation could well settle at a somewhat higher level than before. There are many indications that central banks will tolerate moderately higher inflation figures. If only because this would have a positive effect on the enormous increase in debt. "The central banks' expansionary policy is likely to continue for the time being," says Kreuzkamp.
Sustainability: Underestimated opportunities in blue economy and education
DWS sees great opportunities in the blue economy. This includes companies that use marine resources sustainably for economic growth. Portfolio manager Paul Buchwitz elaborated on how much potential there is in blue economy. "The global gross domestic product of the blue economy was estimated by the OECD at U.S. dollar 1.5 trillion in 2010 and is expected to grow to U.S. dollar 3 trillion by 2030, with ocean-related industries predicted to grow faster than the established economy," Buchwitz said. "However, when we match the blue economy with the 17 United Nations Sustainable Development Goals (SDGs), goal number 14 – life under water – is currently one of the least considered," the ESG expert said. But that is likely to change soon, according to Buchwitz, thanks to rising investor interest as well as regulatory and policy tailwinds. He sees interesting investment opportunities in three areas in particular. First, in solutions that make aquaculture more sustainable. Second, in the decarbonization of maritime transport. Third, in pollution prevention, which is particularly dynamic with regard to plastic waste.
Another promising topic is digital learning. The Covid-19 pandemic, 50 million new students in Brazil, China and India alone between 2015 and 2030, and the need for further training due to ongoing technological change in the workplace, were creating high growth momentum. "As early as 2025, digital could account for 15 percent of global education spending," predicts Buchwitz. By comparison, it was still less than five percent in 2020.
Asian equity markets most promising
DWS sees emerging market Asia as the most promising investment region, both over the next 12 months (expected total return of nine percent) and over the long term. "North Asian countries (China, Taiwan, South Korea) in particular have managed the Covid-19 crisis very well, said Sean Taylor, Chief Investment Officer APAC at DWS. "That's why they've had to take on less debt. That should have a positive impact going forward. Asian countries, and China in particular, are often underestimated or misjudged, he said. One argument often used by skeptics is the high level of corporate debt. However, this is actually much lower than in Europe or the U.S. The fact that growth expectations for China are no longer as high as they used to be is more of an advantage than a disadvantage. China is focusing on higher-quality growth, and per capita GDP is rising. In addition, China has developed from a global copycat into the world's most innovative country. This is clearly demonstrated by the development of patent applications: 43 percent of global patent applications now come from China, followed at a considerable distance by the U.S. (19 percent) and Japan (10 percent). "The tensions between the U.S. and China, which are not likely to disappear any time soon, will accelerate this development even further", Taylor expects.
Alternative assets replace government bonds in a multi-asset portfolio
"Government bonds are currently not worth the risk associated with them." With this statement, Björn Jesch, Chief Investment Officer for EMEA and global head of multi-asset and solutions, drew attention to the difficult situation facing investors. The trend toward rising interest rates is putting pressure on prices, he said. In addition, fluctuations are increasing with higher inflation expectations. Ten years ago, it was still possible to achieve a total return (before inflation) of three percent with a mix of 97 percent interest-bearing investments and three percent equities, and this with fluctuations of only three percent. Today this requires an equity share of 78 percent and 22 percent interest-bearing investments, with the fluctuations, i.e. the risk, being almost four times as high at eleven percent. According to Jesch, alternative investments as part of a portfolio offer a solution, starting with listed real estate investment trusts (REITs) and infrastructure companies to private investments in real estate and infrastructure debt.
Adding alternative investments can help mitigate declines in value in a portfolio and also opens up opportunities for appreciation, the CIO added. With a portfolio of 54 percent equities, 26 percent fixed-income investments and 20 percent alternative investments, an average return of three percent is possible with significantly lower risk (nine percent) than with the sole mix of equities and bonds. In the traditional bond sector, Jesch sees corporate bonds in particular, both investment-grade and high-yield, as a sensible component of a portfolio.
Real estate: logistics and residential in focus
"Covid-19 didn't just hit the economy, it changed the way we use real estate," explained Anke Weinreich, portfolio manager for real estate. She said the pandemic has further accelerated the e-commerce trend in particular: The increasing demand for faster delivery has made last-mile logistics properties the winner of the trend. The residential sector is also in focus, she added: "Home offices are driving demand for bigger apartments. What is sought after is affordable housing in well-connected locations outside the city center," Weinreich said. Commuter properties benefited from this. "We expect the logistics and residential sectors to significantly outperform the broader market, with total annual returns of eight percent over the next five years. For office properties, we expect annual returns of six percent. Retail properties bring up the rear, with expected returns of four percent."
Looking at the regions, Weinreich said: "We expect the U.K. to lead the global real estate markets in terms of total returns at eight percent and the U.S. at seven percent over a period of five years. The German real estate market is expected to perform slightly below the global average at five percent, but also has a lower risk."
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About DWS Group
DWS Group (DWS) is one of the world's leading asset managers with EUR 820bn of assets under management (as of 31 March 2021). 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.
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