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INVESTMENT OUTLOOK
Assessment for the coming months
January 2019

 

The past months in retrospect and a glance ahead

Not just with equities, but also with government bonds, precious metals, commodities, real estate, in short, with nearly all investment vehicles investors lost money in 2018. In the USA the S&P 500 stock index lost -7%, in Europe the Euro Stoxx 50 -15%, in China the CSI 300 -25%, and in Switzerland the SMI -10%. Well, if we look at our forecasts given right here as to the economic development in 2018, they have actually turned out to be very accurate or have even been exceeded. For example, our profit forecasts for the companies in which we invested for our clients were higher than we had predicted. As a result of this positive development of the investment environment, investments should generally have delivered positive results, yet quite the opposite was the case in 2018. Rarely have the forecasts of the experts been so unanimously positive as at the beginning of 2018, and rarely have these forecasts been so much off the mark.

Well, this astounding trick to trigger substantial losses right in the midst of an actually sound and well-fuelled economic situation we owe mainly to a certain Mr. T. currently residing at the White House. That man seems to have set out to quarrel with all trading partners, including neighbouring Canada and Mexico, as well as Europe and China - not to mention other venues like North Korea. Yet other political uncertainties, too, weighed heavily on market sentiment, especially the tug-of-war issues within the European Community, such as those caused by Brexit, or those caused by the wantonly negligent attitude of the current Italian government. And by the by: Mr. Putin, too, continued his course of causing well calculated stirs, be that in Ukraine or in the Middle East, or be it through his hacker hordes. Quite obviously the world (economy) has become less predictable. It is thus hardly surprising that the forecasts of the experts for 2019 are generally much less optimistic than those one year ago for 2018. However, such a cooling off from today's levels would not necessarily have to be seen as the beginning of a recession, but rather as some kind of an overdue normalization. We still expect the global economy to continue to grow in 2019, albeit at a lesser pace. We believe that corporate earnings will continue to be robust; however, the right choice of sectors will be crucial in this context.

In the poker game about the various trade conflicts, which that man from the White House has initiated, we expect that soon the cards will be put on the table, quite simply because enough damage has been done and suffered by now, and that it will come to a kind of compromise which will allow everyone to save face. With regard to the pitfalls within the European Community cited here above, we expect, too, that shortly sustainable solutions will be found, at least for the short to mid term. So, in general, we expect the geopolitical framework to brighten up, which could have an immediate positive affect on the stock markets. Last but not least: The way we see it, it is an auspicious omen that the stock exchanges have ended the year 2018 near their bottoms, for it is quite the opposite that occurred more often in the past, i.e. that the stock exchanges had completed a year at their highs - which then resulted in significant price corrections in the following year. We assume that this will be exactly the opposite in 2019.

 

Commodities

Also by investing in commodities or precious metals investors were not able to excel in 2018. On the positive side, it is true, palladium increased by 19%, but on the negative side, crude oil fell by -19%, platinum by -14%, silver by -10%, while gold fared best with only -3%. The fact that investors, despite all the geopolitical uncertainties, have not yet sought refuge in precious metals, suggests that they still assume that solutions can be found in all the prevailing conflicts. If, on the contrary, these conflicts should escalate, precious metal prices might shoot up quite quickly. Furthermore, and as we expect inflation to rise in 2019, and as gold has historically proven to be a stable investment in times of rising inflation, we generally expect higher precious metal prices in 2019.

 

Economy and Interest Rates

As outlined here above, the global market sentiment has undoubtedly taken a blow in 2018. This is illustrated, for example, by the global purchase manager index PMI, which has softened from over 56 at the beginning of 2018 to a current level of 53 (numbers below 50 are regarded as pessimistic). In this context, a look at the US housing market is revealing, as this market has often proven to be a reliable indicator for the overall US economy in the past. Well, from the lows in the wake of the financial crisis, and driven by a long-standing low interest rate policy, US real estate prices have increased on average by more than 50%. Although there are no signs of gross exaggeration so far, the market has been showing some signs of fatigue since early 2018: Less money is being invested in housing, and recent figures on new housing projects and real estate sales have also been weaker than expected. The main reason for this development, in addition to the marked increase in real estate prices, is the rise of interest rates for mortgages. Given these realities, many households simply cannot afford any longer to buy a home. Thus the development of the US housing market tends to indicate that the US economy might slow down in 2019. In this context it will be quite worthwhile to have a close look at the upcoming set of figures on the state of the US economy. As the US Federal Reserve (Fed) has so far been the only national bank to abandon the zero interest rate policy by raising interest rates in several continuous steps since 2015, these figures will allow us to ascertain as to what extent this rise in interest rates has succeeded in its intention to cool down an economy which is very robust, yet not overheated, or whether the Fed has overshot its mark and thus is about to stifle the economy, as it did occur manifold in past, which would then inevitably lead to a recession. Against this background, we assume that the US Federal Reserve will act very cautiously and leave it at one, or at most two moderate interest rate increases in 2019. Thus we forecast a US prime rate of a maximum of 3%. The other major central banks, in particular the European Central Bank (ECB), which are still pursuing their zero interest rate policies, will have to face the unenviable task of having to gradually raise their interest rates despite a weakening economic growth. However, we expect the ECB's first move to raise interest rates at the earliest towards the end of 2019, especially as inflation has remained quite confined so far. Yet, we expect global inflation to rise at an increased pace in 2019.

Economic forecasts for the next six months:

EUROZONE

 

Growth:

Growth rate, on average of all countries: 1.8%, decreasing.

Employment:

Unemployment rate reaching from 3% (Germany) to 18% (Greece), stable.

Inflation:

On average of all countries: 1.9%, rising.

Interest rates:

Around zero, rising.

Investment opinion:

Neutral.

 

 

SWITZERLAND

 

Growth:

Growth rate 1.5%, decreasing.

Employment:

Unemployment rate 2.7%, stable.  

Inflation:

0.9%, rising.

Interest rates:

Around zero, rising.

Investment opinion:

Neutral.

 

 

USA

 

Growth:

Growth rate 2.5%, decreasing.

Employment:

Unemployment rate 3.8%, stable.

Inflation:

2.5%, rising.

Interest rates:

Prime rate rising up to 3%.

Investment opinion:

Neutral.

 

 

JAPAN

 

Growth:

Growth rate 1%, decreasing.

Employment:

Unemployment rate 2.5%, stable.  

Inflation:

1%, rising.

Interest rates:

Around zero, rising.

Investment opinion:

Neutral.

 

 

CHINA

 

Growth:

Growth rate 5.9%, decreasing.

Employment:

4%, stable.

Inflation:

2%, stable.

Interest rates:

Prime rate 4.3%, stable.

Investment opinion:

Neutral.

 

Currencies

2018 saw a strong Japanese yen; the US dollar was well off, too, while the euro lost against the other major currencies. With the US Federal Reserve still likely to raise rates and the European Central Bank still likely to wait until the end of 2019 for its first round of interest rate hikes, the US dollar's yield advantage over other currencies such as the euro will not only persist until then but will even widen. This will enhance the US dollar’s strength, especially against the euro, which is burdened with all the shakiness of this whole currency alliance, especially because of the unsteady state of such weighty euro countries as Italy under their populist governments. But be aware that the picture of a strong dollar might change very quickly indeed, for instance by a single Twitter message by that man residing temporarily at the White House. Further uncertainties in the currency market could be triggered by persistent trade conflicts, as it is quite obvious that some of the countries most afflicted by rising customs duties might try to deliberately weaken their currencies to counteract, which could easily turn into a full-grown currency war with all its imponderables.

Currency forecasts for the coming six months:

EURO

Under pressure.      

Investment opinion:

Underweight.

 

 

SWISS FRANC

Stable.

Investment opinion:

Neutral.

 

 

US Dollar

Stable, except Twitter messages.         

Investment opinion:

Overweight.

 

 

YEN

Stable.

Investment opinion:

Neutral.

 

Asset allocation

We continue to rely on equities in 2019, which we consider to be the most promising form of investment in the environment described above. We shall diligently use the significant amounts of cash accumulated in our clients’ portfolios for doing so in due course, thus taking advantage of the lower valuations that have resulted from the recent price erosion. While the stock markets are currently oversold, which in itself speaks in favor of an upswing, the markets are not really that cheap, especially as profit warnings have to be expected in many sectors. Therefore, we shall focus on the choice of the sectors and shall pay particular attention to investing in those stocks within these sectors which have the best earnings visibility.

STOCKS
Investment
Opinion:

We continue preferring stocks with sustainably high dividend yields.
  
Overweight.    

 

 

BONDS
Investment
opinion:

 

Strongly underweight.  
 

CASH

Investment
opinion:

We currently hold a high level of cash in view of investing it diligently in due course.

Overweight.  

 

 

 

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