DWS expects global economic growth to slow next year, however the asset manager does not expect an economic downturn or recession. “Growth peaked in 2018, but the fundamental data remains solid”, said Stefan Kreuzkamp, Chief Investment Officer of DWS, as he presented the asset manager’s Capital Market Outlook for the coming twelve months yesterday. He predicted growth of 3.6 per cent for the global economy, 1.6 for the Eurozone and 2.4 per cent the USA. The Chinese economy is likely to grow by six per cent during 2019.
While the current cycle has run for ten years now, DWS doesn’t necessarily expect it to end. However, there are a whole series of risks to the bull market. According to Kreuzkamp these include the ongoing uncertainty on Brexit, given that a total of 759 treaties have to be renegotiated between the EU and the United Kingdom. In addition, he cited the Italian government’s fiscal policy as well as record debt levels in Chinese companies that now equate to 160 per cent of gross domestic product as risks. But the greatest concern for DWS portfolio managers is the trade conflict between the USA and China. “At this stage, the markets are merely a function of this confrontation and most recent price falls demonstrate just how desperate stock markets want to see a resolution”, Kreuzkamp said.
With regard to the monetary policy of central banks, the DWS Chief Investment Officer predicted the Federal Reserve would increase base rates again in December. For next year, DWS’s CIO expects to see the US central bank hike rates another three times. In 2019 the European Central Bank is likely to increase the deposit rate only once by 15 to 20 base points. Main refinancing operations are unlikely to see an increase until 2020.
Correlation between individual asset classes such as equities or bonds is likely to be lower in the coming year. Year to date, 89 per cent of asset classes denominated in US dollars performed negatively, in comparison to 2017 where this applied to only one per cent of asset classes. “Correlation extremes should therefore be a thing of the past and as a result diversified portfolios should benefit”, Kreuzkamp elaborated. Over the next twelve month period he sees the German lead index DAX at 12,200 points.
Petra Pflaum, EMEA Co-Head of Equities at DWS, projects average corporate profits worldwide to grow at a rate of five per cent for 2019. “This should be sufficient to prevent a market de-rating. There will probably be a favourable scenario for growth stocks again in 2019, however value stocks are attractively priced and dividends should increase next year by five to seven per cent on average”, she said at the asset manager’s outlook presentation. Pflaum therefore advised investors to adopt a barbell strategy balancing growth and value stocks. In a positive scenario without further escalating conflicts, investors could overweight emerging markets equities, software providers as well as cyclical stocks. In a converse situation she recommends US titles, consumer goods manufacturers and other more defensive stocks.
“It is music to the ears of any bond manager to hear that global economic growth has peaked”, said Bill Chepolis, DWS’s Head Fixed Income EMEA. This would suggest that central banks would take a view on stable or even reducing base rates, which would be innately advantageous for bond prices, he explained. “Next year we need to keep a close eye on how the European Central Bank handles the transition from rather quantitative easing towards quantitative tightening. When the Federal Reserve completed this process the consequence was stress in emerging markets.” For now, Chepolis advises against engaging with Italian, Spanish or Portuguese sovereign bonds. “The timing should be more opportune when the Italian situation is a little clearer. Admittedly, Spanish and Portuguese debt securities have not suffered losses to the same degree as Italian bonds, however as the confrontation about the Italian budget deficit rumbles on, this could become a problem”, he said.
In Chepolis’ opinion two-year US treasury bonds are conversely very attractive. These papers offer a yield virtually the same as ten-year debt securities at less than half the volatility. Emerging markets bonds should still be a component in portfolios, but could test the resilience of investors. Currently, corporate bonds from Asia offer the best risk-adjusted performance and 77 per cent of these are rated investment grade.
Klaus Kaldemorgen, Senior Strategist Multi Asset and manager of DWS Concept Kaldemorgen, predicts volatility will continue to rise next year. For the S&P 500 the intensity of fluctuation should at least increase to a level around 15 per cent. Consequently, gold is an important diversifier of a multi asset fund. “This is because not only is gold suited to hedging against crises, but for Euro investors the volatility is much lower than for Dollar investors”, Kaldemorgen stated. Furthermore, as a result of prevailing uncertainties the coming year suggests a lower quota of equities for multi asset portfolios. Having said that, the point is not to paint equities exposure as a binary scenario: in or out. Instead the real challenge is to figure out the correct dosage.
For further information please contact:
Sabina Díaz Duque
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DWS Group (DWS) is one of the world's leading asset managers with EUR 692bn of assets under management (as of 30 September 2018). 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 strategic investment approach.
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.