Halbjahresausblick 2019: Auf die Geldpolitik kommt es an

Outlook for the capital markets 2019

Monetary policy will set the tone

Central bank decisions are increasingly setting the tone for the capital markets. “There were hopes that economic growth might pick up momentum and that the trade dispute might ease, but neither has happened so far,” says Jens Wilhelm, member of the Board of Managing Directors of Union Investment with responsibility for Portfolio Management. “The central banks have responded logically and have shifted back towards a more expansionary monetary policy approach. This should keep not only equities and real estate investments but also commodities and selected fixed-income segments well supported. The environment of low interest rates will persist for the foreseeable future.”

At a glance: Six theses for the second half of the year on the capital market

  • Global economic growth is slowing down, but there is no recession.

    Global economic growth is slowing down, but there is no recession.

    “For the US, we are still forecasting GDP growth of 2.5 per cent for 2019, but in 2020 it will drop to just 1.6 per cent. This is going to slow down global economic growth substantially,” predicts Wilhelm. He also expects to see a slowdown in the eurozone. “Both in 2019 and in 2020, the region’s economy will only grow at a rate of around 1 per cent.” For Germany, he predicts growth of 0.7 per cent for the current year and 1.0 per cent for 2020.

  • The trade dispute between the US and China remains unresolved.

    The trade dispute between the US and China remains unresolved.

    “The conflict that underlies this trade dispute is a power struggle between two global superpowers. This is about more than just tariffs,” explains Wilhelm. “Further escalation cannot be ruled out.” Concerns about this prospect are already influencing many business decisions and putting a strain on global trade, which is expected to grow by just 1.5 per cent in 2019. “This takes an important growth accelerator out of the equation for export-oriented economies such as Germany,” says Wilhelm.

  • The central banks will set the tone for the stock markets in the second half of the year.

    The central banks will set the tone for the stock markets in the second half of the year.

    “The central banks have indicated very clearly that they will focus primarily on growth and less on inflation. This expectation has now been priced in by the capital markets and has given opportunity-oriented investments and safe-haven government bonds a real boost,” says Wilhelm. “Provided the central banks stay true to this expected course of action and the economy does not crash, share prices at least should remain supported. But if they fall short of expectations, the whole situation could backfire.” However, in light of low inflationary pressure, Wilhelm is confident that the interest-rate cuts which have already been priced in will also be implemented in reality. “In that case, the second half of the trading year could still prove successful, despite the many challenges facing investors.”

  • Low interest rates are here to stay, but selected bonds look interesting nevertheless.

    Low interest rates are here to stay, but selected bonds look interesting nevertheless.

    Wilhelm believes selected bonds from the eurozone’s periphery, such as Greek and Spanish government paper, are still of interest. This is because government debt is coming down in these two countries. He also sees potential in investment-grade corporate bonds from the eurozone and paper from other regions. “Bonds from emerging markets and corporate bonds from developed countries outside Europe are attractive, especially for investors with a long-term investment horizon.”

  • Equities: Picking the right markets and individual stocks is more essential than ever.

    Equities: Picking the right markets and individual stocks is more essential than ever.

    Wilhelm believes that equities will remain an important investment option in the low interest-rate environment, especially compared with other asset classes. “However, the potential for price gains has become limited,” he warns. “A slightly widening p/e ratio combined with modest profit growth should still generate moderate upward momentum for equities. So picking the right markets and individual stocks is more essential than ever,” he explains.

  • Commodities and real estate are attractive asset classes.

    Commodities and real estate are attractive asset classes.

    Wilhelm views commodities and real-estate investments as attractive options. “Low interest rates and a late-cycle environment are typically good news for these asset classes.”

Growth is expected to slow in almost every major economic region of the world. “For the US, we are still forecasting GDP growth of 2.5 per cent for 2019, but in 2020 it will drop to just 1.6 per cent. This is going to slow down global economic growth substantially,” predicts Wilhelm. The capital market strategist also expects to see a slowdown in the eurozone. “Both in 2019 and in 2020, the region’s economy will only grow at a rate of around 1 per cent.” For Germany, he predicts growth at a rate of 0.7 per cent for the current year and 1.0 per cent for 2020.

Trade dispute remains unresolved

The trade conflict between the US and China also continues to hamper economic growth. “The conflict that underlies this trade dispute is a power struggle between two global superpowers. This is about more than just tariffs,” explains Wilhelm. “A further escalation cannot be ruled out.” Concerns about this prospect are already influencing many business decisions and are putting a strain on global trade, which is expected to grow by just 1.5 per cent in 2019. “This takes an important growth accelerator out of the equation for export-oriented economies such as Germany,” says Wilhelm.

Interest-rate cuts expected in the US and the eurozone

The central banks have already started to change tack. “Interest-rate hikes will be off the table for the next two years,” predicts Wilhelm. In fact, he expects to see more expansionary measures in the near term. “The US Federal Reserve is going to lower interest rates by 50 basis points by September.” The European Central Bank (ECB) is also likely to take action. “The entire interest-rate corridor will probably be lowered by 10 basis points in September,” predicts Wilhelm. He thinks that introducing thresholds for exempt amounts, as done by the Swiss National Bank, could help to offset the impact of negative deposit rates on commercial banks. Another interest-rate cut of 25 basis points is likely to follow in December. “If all of these measures do not prove sufficiently effective, a return to asset purchases might even be on the cards for the ECB.”

Low interest rates are here to stay

Wilhelm’s conclusion is that the low interest rate environment will persist: “Interest-rate hikes seem unlikely in the medium term.” Union Investment’s yield forecast for 10-year Bunds, for example, stands at minus 0.4 per cent at the end of the year. “This yield level is likely to remain relatively unchanged until mid-2020. Interest rates will remain deep in negative territory,” predicts the investment strategist. “Conditions in the eurozone are strongly reminiscent of Japan.” Yields are expected to continue falling in the US. Yields on 10-year US treasuries, for example, are expected to drop to 1.9 per cent by the end of 2019.

This means that ‘safe-haven’ government bonds are not going to offer much profitability in the medium term, unless yields plunge much further in the near term. On the other hand, Wilhelm points out selected bonds from the eurozone periphery that might be attractive, although he advises caution when selecting issuers. “We are favouring Greek and Spanish government bonds, as government debt is coming down in both countries.” Italian bonds, however, are being adversely affected by stagnating economic growth in Italy. Wilhelm also sees potential in investment-grade corporate bonds from the eurozone and paper from other regions. “Bonds from emerging markets and EM corporate bonds from outside Europe are attractive, especially for investors with a long-term investment horizon,” he concludes.

Equities, commodities and real estate remain attractive

Wilhelm believes that equities will remain an important investment option in the low interest-rate environment, especially compared with other asset classes. “However, the potential for price gains has become limited,” he warns. “Weakening economic growth and higher wages combined with rising costs as a result of trade barriers are really hurting companies’ profit margins. Profits will only rise to a limited extent,” he believes. This means that the valuation of equities becomes a crucial factor. “A slightly widening p/e ratio combined with modest profit growth should still generate moderate upward momentum for equities. Picking the right markets and individual stocks is more essential than ever,” Wilhelm explains.

His regional preference is for more defensive markets such as the US. Overseas investors, in particular, are likely to steer clear of European equities in light of prevailing political uncertainties (e.g. in relation to Italy and Brexit). “This, on top of slowing economic growth, is limiting the potential for price gains on equities noticeably,” Wilhelm concludes. Commodities and real-estate investments are attractive options in his opinion. “Low interest rates and a late-cycle environment are typically good news for these asset classes.”

Central banks will set the tone for stock market trends in the second half of the year

A few hopes have been disappointed in recent months – the global economy failed to generate self-sustaining growth momentum, the trade dispute has not eased and monetary policy conditions are still far from ‘normal’. Wilhelm thus believes that the positive trend in the market is mainly attributable to the central banks’ decisive action. He also identifies them as the key driver for the markets in the second half of 2019. “The central banks have indicated very clearly that they will focus primarily on growth and less on inflation. This expectation has now been priced in by the capital markets and it has given opportunity-oriented investments and safe-haven government bonds a real boost,” concludes Wilhelm. “Provided the central banks stay true to this expected course of action and the economy does not crash, share prices at least should remain supported. But if they disappoint expectations, the whole situation could backfire.” However, in light of low inflationary pressure, Wilhelm is confident that the interest-rate cuts which have already been priced in will also be implemented in reality. “In that case, the second half of the trading year could still prove successful, despite the many challenges facing investors,” he concludes.

Unless otherwise noted, all Information and illustrations are as at 9 July 2019