High price volatility in many asset classes has kept investors on all financial markets on suspense over the last few weeks. Almost simultaneously, oil prices broke the resistance level of 90 USD, the gold price rocketed to over USD 800, and works of art were auctioned at record prices. And despite the US subprime crisis, equity markets remained surprisingly stable. No doubt: New players have emerged on financial markets: "The rapidly increasing wealth of new investor groups such as petro dollar investors, Asian central banks and hedge funds is looking for attractive investment opportunities", Klaus Martini, Global Chief Investment Officer of Deutsche Bank Private Asset Management told the press in Frankfurt today. "The world experiences a fundamental transition."
The economic rise of the Emerging Markets has simultaneously triggered off a shift of growth centres and capital flows from industrialized to EM countries. Global economy has thus become substantially less dependent on the US over the last few years. "In 2007, EM countries already account for 75 per cent of global economic growth – with China alone, which is set to become the third largest economy of the world in 2008, contributing 30 per cent," Martini said. "This development will continue and determine market events in 2008."
This means that the world economy should remain healthy in the years to come and grow at an average rate of 4.5 per cent annually. "The subprime crisis is not yet over, and the danger of a US recession still exists," Martini added. He nevertheless expects a stabilization of the US economy in 2008. The reasons are: rate cuts, export growth and the good shape of Corporate America. All in all, he expects a growth dip in the winter half year followed by a recovery towards the end of 2008.
Return of inflation only an interlude
Higher oil prices have boosted inflation in Euroland and the US in the last few months. The US inflation rate should be over 4 per cent in the next weeks, Euroland inflation over 3 per cent. However, inflation will fall again in the course of 2008: The negative base effects from soaring oil prices will fade out. Global division of labor still keeps prices for goods and wages structurally low. Since Emerging Markets have joined the international labor and capital markets 20 years ago, the world's labor force potential has increased fourfold. Another factor are deregulations and significant political reforms.
"The US dollar should remain weak over the short term, even testing the 1.50 threshold to the euro. Over the medium term, there are reasons for a stabilization of the greenback: improved US economic situation, expiring rate cuts and a reduction of the twin deficits," Martini said. "The yen will continue to be prey to carry trades."
The big central banks will continue to pursue different monetary policies. Further rate cuts are expected in the US to prevent the economy from slowing down too much. The European Central Bank should remain on hold for the time being but cut rates in 2008. For Japan, Deutsche Bank forecasts a slow increase – official rates should reach 1 per cent in twelve months.
Bond markets: Continue to be relatively unattractive
"Bonds continue to be relatively unattractive," Dr. Helmut Kaiser, Global Chief Investment Strategist of Deutsche Bank Private Asset Management said. He expects higher bond yields in the medium run after global capital markets have calmed down and the 'flight to quality' has waned.
Equities: Increased uncertainty short-term – positive outlook medium- to long-term
Equity markets are currently driven by conflicting forces: On the one hand, they are negatively influenced by weaker economic growth in the US, rising credit costs and the fact that profit growth has peaked. On the other hand, they are supported by the Fed rate cuts, the robust world economy and ample and even further growing liquidity. "Also the favorable valuations of most equity markets, which are, with price earnings ratios between 12 and 14, substantially lower than in 2007, support a positive outlook for equities medium- to long-term," Martini stated. However, selection is key in Emerging Markets because some markets are highly valued. Where recent stock price advances are excessive, we recommend tactically hedging equity holdings and temporary profit taking," Martini said. He generally favors large caps over small caps and growth stocks over value stocks.
Favorable perspective for hedge funds and selected commodities
Due to the diversification features of Alternative Investments, this asset class is in great demand. Hedge funds thus managed to close the difficult third quarter in positive territory. "Performance year-to-date is on track," Martini said, "and on a US dollar basis, the 2006 results should almost be repeated in 2007."
Among commodities, agricultural commodities such as soybeans, corn and wheat should have the largest price potential. The reasons are: China and India, which used to export large quantities of grain, have meanwhile turned into net importers of corn and wheat. But agricultural commodities are not only used as food – they are increasingly used to produce alternative energies. Global inventories have reached lows, and climate change results in more volatile harvests. The demand of gold should remain on a high level. In the medium run, a price of USD 1,000 per ounce is well possible.
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