The German bank sets out whether its predictions on investment for the start of this year still hold true.
The half-way point of 2017 has already gone past and some wealth managers are taking stock of the predictions they made at the start of this year. The past few months have seen US President Donald Trump wrestle with healthcare reform and his corporate tax cut agenda; the UK and France held general elections, in their different ways having a big influence on the path of Brexit for the UK. Economic growth has continued, while concerns linger that stock markets’ bull runs are long in the tooth and looking due for a correction.
Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management, and his colleagues, examine 10 predictions and views the German bank set out at the start of this year and see how they hold up today:
While the Fed will continue to be the only major central bank raising rates, the ECB and BoJ’s ultra- accommodative policy will likely become less pronounced as the former begins reducing (tapering) their asset purchases and the latter moves to a more neutral policy stance, respectively. The US administration's inability to pass major tax reform or infrastructure programs will likely delay the fiscal stimulus until late 2017 or early 2018, at the earliest.
As we expected, President Trump’s trade policy has been less combative than his campaign rhetoric suggested. The renegotiation of trade agreements with countries like Mexico, appears likelier than major disruptions in commercial relations.We expect incremental, rather than monumental changes ahead. As a result, fading protectionist rhetoric is more supportive of our positive view on Emerging Market equities.
Declining interest rates since the start of this year contradict the realities of improving global growth. An accelerating, synchronous global economic growth backdrop, combined with the tightening cycle of the Fed and less accommodative monetary policies by the ECB and the BoJ should push interest rates up in the second half of the year.
Within the fixed income market, credit has been the clear outperformer in the first half of the year as credit spreads across the globe have continued to narrow. Although we still consider these sectors to have a generally positive return profile over the next twelve months, their overall return potential has diminished. However, the one sector that provides the most upside, thanks to a modest further spread narrowing from current levels, is emerging market bonds.
Equities have enjoyed a generally good first half of the year with the MSCI All Country World notching more than 25 record highs YTD. Despite the slight increase in price/earnings ratios, earnings growth has been the prominent driver of the rally this year. While earnings in the US and Japan have been strong, they have been overshadowed by the earnings growth and upward revisions seen in the eurozone and emerging markets. As a result, our preference has shifted to these markets.
Technology has been our favourite sector and despite the ~20 per cent rally we have seen since the start of the year, we see no need to alter that view. Technology is a growth sector that continues to deliver above average earnings growth. The visibility in tech earnings is apparent given the multiple dimensions that tech is being deployed in all of our lives, from computers to healthcare to financial transactions. And we do not see that momentum slowing: in fact, we see it continuing with the advent of robots and artificial intelligence.
As we had forecast, increased production by non-OPEC producers, particularly the United States, has led to increased inventories and placed a “lid” on the price of oil. As a result of excess supply, we have decreased our 12-month price target from $58 to $50/barrel. However, it is important to note that on the other side, we believe there is a floor for oil around the $40-$50 level as producers find it unprofitable to pump oil at these low levels, thus reducing supply.
Several factors have led us to temper our strong dollar forecast and forgo our parity call for the dollar versus the euro. First, delays in the pro-growth Trump administration’s policies have not bolstered growth and in fact, the delay has led to disappointments in the US growth trajectory. In contrast, we have upgraded European growth twice this year. In addition, a likely less accommodative ECB, combined with increased economic confidence in Europe continues to support the euro. Our new 12-month euro target versus the dollar is 1.10.
That the VIX (volatility index) is currently at historically low levels should not mask our expectation that volatility is likely to increase on the back of major “headline” risk. In the US, continued confrontation over the expectation and reality of President Donald Trump’s policy agenda is likely to get ratcheted up as the Congressional calendar quickly closes. In the UK, Brexit negotiations are set to intensify, particularly after the German elections this fall. In addition, geopolitical concerns, from the Middle East to North Korea to Russia, show no signs of dissipating.
The fundamentals driving our longer term secular themes continue to come to the forefront and are becoming closer and closer to portfolio “staples” for investors. The four long term themes: cyber security, millennials, global aging and infrastructure are all positive YTD. Fund flows to these themes should remain supportive as awareness of these powerful trends becomes more mainstream.