Uncertainty is the word of the moment. Uncertainty about global trade, about Brexit, about recessionary
tendencies, about the situation in the Middle East, about… Yet, markets seem to have learned to cope with this
environment and market participants seem to have understood that global central banks keep their
expansionary monetary policies in place and are attentive to any signs of shortcoming. While we think that the FED is done for 2019, the European Central Bank’s (ECB) new asset purchase program has just started and will
last as long as necessary. Central bank governors argue in line with many economic advisers that finally
governments need to take the lead to support growth dynamics.
Macroeconomic and political instability – if it lasts – may have negative effects on economic development through lower investments or weaker private consumption. While the uncertainty around Brexit has lightened with the parliamentary election on December 12th, there is still no sustainable solution visible in the trade conflict between the US and China, and, therefore, we expect GDP growth rates to remain subdued. Meanwhile, the last set of macroeconomic data indicates that we may have seen the trough and that the economic environment is slowly improving again. Overall, we think that the recession risk has eased and a global downturn is not on the horizon in 2020 nor 2021, although, economic
development will remain slow, together with low inflation rates and limited room for fiscal stimulus. Investors
should remain cautious with political developments and expect volatility to increase again.
The recent increase in bond yields has impressively demonstrated that the investment risk of longer dated
government bonds cannot be ignored, with the relatively small increase of 40‐50 basis points (bps) decreasing
the value of 10‐year bonds by 3.5%‐5.5%. Based on this, we think that government bonds are too volatile for
the relatively small return potential. Furthermore, we believe that credit spreads are too narrow, yet we
acknowledge that they may remain so for quite some time, especially in Europe where the ECB has just started
its new asset purchase program, which should prevent spreads widening and rates increasing. Taking all these
factors into account, equities remain the more attractive asset class even after the recent stock market rally.
The US economy performed in Q3/19 slightly better than expected with 1.9% real annualized GDP growth. The
main driver of growth was again private consumption, with a growth rate of 2.9%. Consumer expenditure is
clearly the No.1 factor of the US economy, representing 68% of overall GDP. While the fourth quarter 2019
should display a similar GDP growth rate of roughly 2%, we expect macroeconomic dynamics to moderate in
2020, as employment growth is forecast to slow. However, business sentiment is expected to improve in the
coming quarters after a sluggish growth in 2019. Hence, corporate spending could partially offset the expected
downturn in consumer expenditure. As we expect the US GDP growth to remain subdued next year, it is
possible that the FED cuts interest rates again, which could weigh on the USD. While we think that the USD may
remain stable in the short‐run thanks to the favorable interest rate differential relative to other currencies, the
more the FED reduces rates the more this advantage for the USD fades, which could lead to a weaker USD in
European industrial production and trade have softened in‐line with global trends. While exports weakened due
to the subdued outlook for global trade, easier financial conditions combined with a strong labor market have
been supportive for domestic demand. While Germany and Italy narrowly missed a technical recession in Q3,
Finland, The Netherlands, Belgium, France and Portugal have all displayed positive growth rates of between
0.5% and 0.3% Q‐o‐Q. The forecasted GDP growth rate for the Eurozone for 2019 of 1.1% will be the lowest
reading since 2013. Even if the outlook for 2020 is less bleak, we expect macroeconomic development to
remain below potential growth. Positive momentum from fiscal spending in some Eurozone countries such as
The Netherlands or France could enhance overall growth projections. At the same time, it will be key to monitor
the rise in wages relative to the increase in reported productivity. Up to now the pick‐up in wage growth
displayed only very limited effects on consumer prices, as Europe has still been in a period of subdued inflation
expectations as well as ongoing pressure on prices due to a highly competitive environment.
Similar to other export‐oriented economies, Switzerland feels the effects of the global slowdown. The readings
of the manufacturing PMI are below 50 since April, indicating tough times for Swiss industrial companies. Yet, as
the sector represents less than 20% of the overall economy, the recession risk stays muted. Stable private
consumption, real estate investments and government expenditures continue to keep Swiss GDP afloat. The
strong CHF coupled with the very low inflation rate continue to give the Swiss National Bank (SNB) a headache.
In the short‐run, we expect the SNB to manage the situation rather through currency interventions than interest
rate cuts. Nevertheless, the SNB has started to prepare the ground for a potential rate cut in 2020.
Meanwhile, growth prospects in Japan remain muted as the trade dispute between South Korea and Japan is
weighing on macroeconomic development. Moreover, a hike in the consumption tax has been implemented in
October, yet, thanks to offsetting policy measures the impact will be limited. In addition, the recently signed
bilateral trade agreement between the US and Japan is expected to provide a small push to the economy. At its
October meeting the Bank of Japan (BOJ) has left key interest rates unchanged. However, based on the weak
inflationary trend, the BOJ has not ruled out further rate cuts or additional asset purchases should
macroeconomic data deteriorate or the JPY strengthen again.
In October most of China’s year on year economic indicators continued to be relatively slow. The trade conflict
with the US takes its toll with weak investments and exports impacted by the higher tariffs. China’s industrial
production slowed to 4.7% in October, the second weakest growth reading in the last ten years. Yet, investors
should keep in mind, that this weakness also reflects the economic disruption caused by the celebration of the
70th anniversary of the founding of the Peoples Republic of China. Medium term, we expect growth to snap
back to rates of around 5.5% ‐ 6% in 2020 and 2021. The Peoples Bank of China (PBOC) has cut its loan rate
(MLF) by 5 basis points to 3.25% earlier this month. A very modest rate cut, compared to the recent easing in
the US and Europe which leaves the PBOC ample room to maneuver.
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