What are your economic forecasts for Europe, the United States and Asia in 2020?
Joachim Fels & Nicolas Mai: We expect the global economy to reaccelerate gradually in 2020 on the back of better global trade conditions and monetary easing getting traction. As of December, we saw US growth of around 1.5%-2%, and Eurozone growth of around 1%. China, on the other hand, is seen as continuing to slow towards 5.5%. The Coronavirus outbreak since January poses some downside risk to the forecasts at the margin, especially in Asia.
Will the low interest rate environment last, especially in Europe? What about inflation? Can we talk about a scenario of Japanisation of Europe?
We see the environment of low growth, low inflation, low interest rates continuing in Europe. Like Japan, the Eurozone suffers from weak demographics and high debt levels. It is very much exposed to ‘Japanification’.
Can we say that the equity and bond markets are in the midst of a bubble?
Risk asset valuations looks elevated, propped up by central bank liquidity injections. We see a case for being cautious and selective when taking risk in the current market environment. Core bond yields also look very low from a historical perspective, although this is driven in part by a secular decline in equilibrium rateswhich is here to stay, due to forces like demographics, high debt levels and low inflationary pressures.
Should we be worried about the US budget deficit? Are the US elections a risk for the markets?
US elections could be a catalyst for short term market volatility, partly given the presence of candidates with fairly radical economic views in the race. As for the deficit, the market is likely to continue absorbing Treasury issuance at the moment, as Treasuries remain the undisputed global safe asset. Over the long run, the rise in US debt could be an issue, but it is unlikely to be a source of instability for now.
What risks are weighing on the financial markets at present and which asset classes should be favoured? Should we invest massively in gold?
High political and policy uncertainty globally, a highly levered Chinese economy, and ongoing increases in corporate debt in the US among others are risks that we are watching closely. Generally, we stress the importance of being selective in taking risk and investing in names and sectors that we have conviction on (US housing and global banks being important areas in this regard). Gold can have good risk off hedging properties in an uncertain environment.
