Deutsche Bank’s House View for 2019

Investing

World

  • Recovery has plateaued in line with our outlook for fundamentals; global economy is still set to expand in 2019, with economic slack receding and labor markets tightening; growth will level off in the US, recede somewhat in Europe, and hold in EM – despite a slowdown in China – over the next several quarters
  • Cyclical non-linearities could produce a faster decline in activity than anticipated or priced-in; aggressive quantitative tightening, political risk, and front loading of recession/sharp correction in financial market also pose as key downside risks

US

  • Set to continue growing at a strong and above-trend pace, albeit slightly more slowly, for the next several quarters; we forecast real GDP growth of 2.7% in 2019 and 2.1% in 2020; this is supported by strong domestic consumption and healthy capex; tax cuts and fiscal spending acts as tailwinds and are expected to remain supportive through 2020
  • Recession in 2019 does not look imminent – there are no clear investment overhangs, wage growth is rising, unemployment is at 50-year low, and productivity is set to accelerate
  • Notable downside risks include: 1) escalation of trade war resulting in higher tariffs; 2) negative resolution of European risks; 3) nonlinearities in Phillips curve and rise in inflation; and 4) flattening yield curve portending a slowdown

Eurozone

  • Downgrade 2019 euro area growth forecast to 1.4% from 1.7% and see 2020 GDP growth at 1.3%; waning external demand is weighing on euro area growth – externally sensitive manufacturing PMIs fell to two year lows, global export orders dropped to 2016 lows, recent national survey data indicates declining business confidence in Germany, France and Italy; ECB also noted weakness in economic activity and lowered its forecasts for 2019 GDP growth
  • Euro area’s domestic resilience remains strong – pick-up in wage growth (2.5%), productivity growth (0.75%), stable corporate margins, falling unemployment rate, still-accommodating ECB policy, and easy financial conditions

China

  • Chinese growth to slow down from 6.6% this year to 6.3% in 2019 and 6% in 2020
  • US-China trade war and associated slowdown in exports are key risks; more importantly, the cooling real estate market poses the greatest risk to growth
  • November macro activity data confirmed the negative signal in economic activity – land auctions at -2.7% yoy, continued weakness in auto sales, industrial production growth fell to 5.4% yoy, retail sales growth lowered to 8.1%
  • Expect the Chinese government to hold its policy stance in 2019 – expect further tax cuts and easing of property sector regulations early next year; expect three RRR cuts in 2019 by the PBoC, and no change in interest rates as inflation rises only modestly

Emerging Markets

  • Protraction of the global business cycle’s expansion bodes well for EM economies – expect EM to grow 4.7% 2019 and 4.8% in 2020
  • Liquidity fears that exposed the more vulnerable EMs in 2018 seem unlikely to repeat next year, given low chances of US recession in 2019, gradual tightening cycle, and expected dollar weakness
  • Election cycle in India, Argentina, Indonesia, and South Africa could provide election-related boost

Key Metrics / Themes

  • Monetary policy: 1) Fed: 3 hikes; ECB: QE to end in December; 2) ECB: first 15bp depo rate hike delayed to March 2020; 3) BoJ: discussion in next 2-3 years on changing policy goal from inflation to growth or price level; 4) BoE: one hike penciled in for August 2019; 5) PBoC: three reserve requirement ratio cuts
  • Key downside risks: Crash Brexit; Italy, France, EP election; Trade conflict
  • Market sentiment: higher risks – fundamentals are still strong, but reduced accommodation will lead to heightened risks; episodes of higher volatility will become more common moving forward
  • Bullish US equities: earnings are strong and underlying growth is robust; current conditions appear oversold and inconsistent with the macro outlook
  • Rates: strategically bearish; we continue to expect the Fed to tighten policy further, inflation to rise, the term premium to increase from low levels; in Europe, we expect yields to rise as ECB ends QE, though macro momentum has softened
  • FX: dollar pressured longer term – near-term risks are balanced, but our strategic view is still for further dollar weakness (exception is that we expect the dollar to rally further versus yuan); bullish euro next year; lean bullish yen
  • Credit: expect near-term relief rally in spreads in Q1 and structural widening later on; EUR credit looks cheaper and should outperform the relatively expensive USD HY in 2019
  • EM: prefer EMFX and also EM sovereign credit; above potential global growth, USD weakness, contained US overheating risks and gradual tightening to benefit EM FX in particular, and also HY and EM credit markets
  • Oil: OPEC’s production cut to act as stabilizing action and cancels out further sharp downswings, but 2019 balances may yet remain in small surplus and favor prices remaining below equilibrium; lack of direction in the near-term to be influenced by negative risk and macro sentiment

The House View – Deutsche Bank Research

Image Source: BCD Travel

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