German Bunds are currently very low

Political conflicts and trade tariffs are weighing on sentiment. Economic growth is slowing and volatility in financial markets has increased. In the wake of the normalization of monetary policy by central banks safe assets are becoming less attractive. In the current environment we favor stocks in defensive sectors as well as HY and IG hybrid bonds.

Economy

Global growth momentum is waning. However, we see no signs of a severe slowdown in the US economy, but rather a correction from above-average, non-sustainable growth rates. In 2019 we expect US GDP growth of 2.3% y/y. Despite an ever tighter labor market, wage pressures remain subdued and there are no indications for an increase in US inflation rates yet. The euro zone economy is suffering from trade disputes and political uncertainty. In view of weakening export and investment growth momentum we are forecasting a decline in GDP growth to 1.5% in 2019, with a hard Brexit representing a potential downside risk. By contrast, an easing of trade tensions could lead to an improvement in economic growth prospects. The recent strengthening of wage growth should support a slight increase in headline inflation to 1.9%.

Bonds

The ECB will maintain its policy course and make a decision on rate hikes after the summer at the earliest. Due to political uncertainties and trade disputes, yields on German Bunds are currently very low. Even though the economy should lose momentum next year, the current level of yields is not justifiable. We therefore expect Bund yields to increase. Next year it will be more difficult to forecast the Fed's monetary policy, as the FOMC seems set to make rate hikes increasingly dependent on incoming data. We expect economic growth in 2019 to be sufficiently strong to justify three rate hikes and trigger a rise in yields on US treasuries. Valuations in the corporate bond market are already pricing in a lot of negative news flow. Should no additional risks materialize, we expect HY and IG hybrid bonds to outperform IG-rated corporate bonds.

Currencies

The appreciation of the US dollar has not come to an end yet, but we expect there will be a trend change in the course of 2019. Political uncertainties are lending support to the Swiss franc and we expect the currency to strengthen slightly further against the euro to a level of 1.13 by Q1 2019. In this environment we expect a slight increase in the gold price, which is underpinned by softening economic growth as well.

Stocks

Political uncertainties and slowing economic growth are leading to heightened volatility in stock markets. Thus investors should overweight defensive sectors such as health care or consumer staples more significantly than previously and reduce investments in cyclical sectors. We expect global stock market indexes to post moderate gains at the lower end of a range from 0% to +5% in Q1, amid continued high volatility.

Download The Full Global Strategy