Head of Investment Wealth Management Switzerland
Political markets dominate the current environment. A reduction or disappearance of these risks would probably send equity markets soaring. The fundamental picture has become gloomier over the short term. However, it will undoubtedly improve again soon, thanks to Europe and the emerging markets. Over the medium term, investors are ad-vised to get ready for a market re-entry.
Although global growth expectations for 2019 have dimmed noticeably, we are only expecting temporary growth weakness and not a recession. Conditions are anticipated to stabilise in spring and summer. The Chinese economy is likely to pick up again, and the euro area's homespun problems should abate.
Global economic growth momentum is likely to slow from 3.3% in 2018 to 2.9% in 2019, and US growth to decline from 2.9% to 2.4%. Europe is reporting less momentum and is still struggling with growth rates below 2%. A key reason for this growth slowdown is the announced switch from an ultra-loose to a "normal" monetary policy. Market participants fear that central banks could trigger a recession by adopting an overly restrictive monetary policy stance.
Worries that growth might slow too sharply will probably prompt the US central bank (Fed) to hold off with too rapid rate hikes. US interest rates could stand at 3% in mid-2019 and then decline again gradually.
A cooling down is basically nothing negative, only part and parcel of a normal, healthy economic cycle. But this time it is being driven virtually exclusively by political factors with binary outcomes. The trade dispute between the US and the rest of the world already worried us in 2018 and could reach a crucial turning point in 2019.
A global escalation could plummet the entire world into recession. We consider this scenario improbable and expect President Trump and China to come to an agreement. In Europe, the major net borrowers Italy and France will also give rise to turbulence next year, as will the UK's Brexit.
Italy, France and the US are prime examples of how people's fears can influence the way in which they vote. A rise in debt is being preferred to unpleasant structural reforms.
Interestingly, the US and Italy will have to refinance more than 50% of their outstanding debt in the next 18 months. Borrower quality will be a key selection criterion for investors next year. This applies to both government and corporate bonds.
In such an environment, having a widely diversified portfolio is particularly important. Heightened political uncertainty has prompted us to maintain a neutral to slightly positive equity weighting. In the wake of 2018's correction, equity valuations look fair again, and the markets appear to have already discounted a largely pessimistic economic scenario for 2019. We prefer the US, Europe and emerging markets and are avoiding UK equities for the time being.
We remain cautious on debt securities and are avoiding long-dated bonds given not-to-be-underestimated inflationary risks. We will also be raising borrower quality during the course of the year. We have benefited from a normalisation in yields for US investors and have started to buy government bonds. Nonetheless, we are retaining a short duration. We consider emerging market bonds as being reasonably priced, but they must be carefully selected.
Please click download to read the full report.
Please send any comments or questions relating to this or another publication to: firstname.lastname@example.org
Schroder & Co Bank AG
Disclaimer – Please note that this document is published for information purposes only. It does not constitute nor purport to constitute any form of advice, recommendation or offer, or invitation to offer, or solicitation, to buy, invest in or subscribe for any financial instrument or service, and any representation or warranty in respect of any financial instrument or service. This document does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The financial instrument and services men-tioned in this document may not be suitable for certain recipients of this document. A person receiving or reading this document should seek advice from a financial and/or tax adviser regarding the suitability of such financial instruments and services, taking into account the specific investment objectives, financial and tax situation or particular needs of such person, before making a commitment to purchase or subscribe for any of such financial instruments or services. All information in this document was obtained from sources believed to be relia-ble and in good faith, but no representation or warranty, express or implied, is made as to its accuracy, completeness or timeliness. Schroder & Co Bank AG, its directors, officers and employees accept no liability for any loss whatsoever, direct or indirect, arising from the use of such information. Past performance is not necessarily indicative of future results. Financial instruments and services are available only in those jurisdictions where they may be legally offered. Changes may be made to financial instruments and services at any time without prior notice to you. Any financial instrument or service referred to herein may not be offered or sold within the United States or to or for the benefit of US Persons.
Head of Investment Wealth Management Switzerland
Head of Investment Solutions
To discuss your wealth management requirements, or to find out more about our services and how we can help you, please contact: