There will be no rapid return of the global economy to the level it was in before the outbreak of the coronavirus pandemic, according to the latest market outlook from DWS.“We do not anticipate that a vaccine will be available as early as the beginning of next year. Rather, we expect that there will be further waves of coronavirus, but these should be manageable,” said Stefan Kreuzkamp, Chief Investment Officer (CIO) of the asset manager, on Wednesday at the half-yearly capital market outlook.
Against this background, the sharp recession this year will be followed by only a modest recovery in 2021. With the expected further waves of coronavirus, the capital markets will then also retain the associated risks for certain business models and sectors, which is why active security selection across all asset classes will remain the trump card.
Specifically, DWS expects the global economy to shrink by 2.6 per cent in 2020 and then grow by 5.4 per cent in the coming year. Kreuzkamp predicted a much milder course for China, whose economy will grow despite the coronavirus pandemic by one per cent this year and by nine per cent in 2021. He cited the government’s swiftly implemented measures to manage the crisis, the large share of the country’s economic output accounted for by the technology sector and the comparatively high per centage of online business models. DWS forecasts a slump of 7.5 per cent for the eurozone in 2020 and 5.7 per cent for the USA. This should be followed by recoveries of 4.5 per cent and 5.6 per cent respectively in the coming year.
The above-average decline in the eurozone should lead to a substantial increase in public sector debt. For France, the asset manager forecasts an increase to 111 per cent of the gross domestic product (GDP) in 2020 compared to 99 per cent last year. For Italy, the ratio of liabilities to GDP should even rise to 155 per cent from 137 per cent.
“This is a critical level and against this background I am often asked whether I see Italy as a new Greece or a new Japan. In my opinion, Italy is more comparable to Japan, partly because of its external surpluses and partly because of its competitiveness compared to Greece,” said Kreuzkamp. For Germany, on the other hand, DWS only expects an increase to 65 per cent in 2020 from 57 per cent last year.
But although the global economy is likely to return to a subdued growth path as early as next year, the crisis triggered by the coronavirus pandemic will lead to long-term changes, according to the asset manager. The free market economy is likely to have reached its peak, as governments are likely to play a more active role in the future and claim a say in investment decisions, for example. At the same time, countries and companies are likely to seek to reduce their dependence on imports, which will accelerate the trend towards the de-globalisation of manufacturing.
In order to finance measures to dampen the effects of the coronavirus pandemic, Kreuzkamp believes that many governments are likely to turn the tax screws and at the same time tolerate higher inflation rates in order to reduce the debt burden. And finally, the time after the coronavirus pandemic will be “greener”, as many states and supranational organisations will not be content with their economic stimulus programs to revive the economy in general, but also want to give an impetus towards a more sustainable economy. As an example, the CIO referred to the objective of the planned EUR750 billion EU recovery plan, which is intended to build a “modern, clean and healthy economy, which secures the livelihoods of the next generation”. In addition, he said, the trend towards digitalisation is being reinforced, both by the need for a more flexible working environment and by the need for new technologies and therapies in the pharmaceutical industry.
A globally diversified equity portfolio, including emerging market equities, is best suited to benefit from a recovery in corporate earnings, Kreuzkamp said. For example, Asian companies, which were the first to be affected by the consequences of the coronavirus pandemic, would also be the first to leave the crisis behind. Moreover, thanks to the effective response of governments to the threat, profits in the region have fallen less than in other parts of the world. For US companies, profits initially were hit hard, for example due to high levels of loan provisions by banks or losses due to the collapsing oil price for shale oil producers. However, securities from the world’s largest economy should subsequently benefit from the fact that around 60 per cent are coming from young and healthy companies from essential sectors such as technology, health care and communications.
With a view to the different characteristics of shares, Kreuzkamp recommended maintaining the bias towards structurally growing stocks, whose dynamics are accelerated, for example, by measures to create social distance or the increasing share of work in the home office. At the same time, however, investors should selectively supplement their portfolios with value stocks, for example from the materials sector, which could benefit from a cyclical recovery.
After the rally of recent weeks, the CIO has been rather cautious about the further outlook for the stock market. Important indices such as the Dax or the S&P 500 had already reached DWS’ forecasts for the year-end level.
“For the second half of the year, investors will probably have to expect more volatility and temporary setbacks, but they should regard these dips as buying opportunities,” Kreuzkamp said.
As interest rates for government bonds would remain low for a long time to come in view of the gigantic purchasing programs of the most important central banks, the CIO recommended focusing on corporate debt instruments. In the area of investment-grade bonds, he said that in the USA, debt instruments from more defensive sectors with maturities of less than five years and issuer credit ratings of “BBB” and “BBB-” who receive implicit or explicit support from the government or the Federal Reserve were particularly interesting.
For European investment-grade bonds, Kreuzkamp also recommended to look for support from the CSPP or PEPP program of the European Central Bank and to consider debt instruments from the financial sector, especially from banks on the periphery of the euro zone. With regard to high-yield bonds, he pointed out that slumps in this asset class have regularly been followed by sustained recovery phases in the past. In his view, selective investments in “fallen angels” from the aviation and automotive industries, for example, could be interesting. He also mentioned selected investments in more cyclical companies with sufficient liquidity, for example from the logistics or chemical industries.
Since governments are prepared to tolerate higher inflation rates in order to reduce the mountains of debt that have been raised to contain the consequences of the coronavirus pandemic, Kreuzkamp believes that inflation-linked government bonds could also prove attractive. With regard to the currency market, he predicted that the dollar would remain strong, as the Greenback had once again proven its status as a global reserve currency during the crisis. At the same time, the Renminbi could weaken in view of the expected renewed conflicts over technology and the treatment of Hong Kong.
With regard to alternative asset classes, the CIO pointed out that the coronavirus pandemic was likely to cause distortions in the real estate market, which would require a more precise selection of properties. In his opinion, office properties in peripheral locations, co-working buildings and decentral shopping centres are damaged in the long term. In contrast, premium logistics properties could benefit from the crisis and demand for larger, but affordable, high-quality residential properties in suburbs inhabited by commuters could increase.
