Stock markets not on a diet yet
Deutsche Asset Management Investment Conference: Chief Investment Officer Stefan Kreuzkamp encourages to look beyond 2018 to 2019
It is part of the long-standing tradition at the annual investment conference: When the chief investment officer speaks, the roughly 1,000 distribution partners of Deutsche Asset Management are all ears. Many pull out their smartphones, taking pictures of the slides presented during his speech and forwarding them directly to their clients and colleagues – and this is exactly what happened once again at the meanwhile 18th investment conference in the Old Opera House in Frankfurt this week.
Kreuzkamp's message to investors is brief and pointed: The economic recovery is on track this year and also in 2019 but inflation is on its way back to the agenda. Basically stick with equities, get even more picky with bonds and don't be upset by market setbacks as long as the US yield curve remains positive, i.e. 2-year bond yields being lower than 10-year bond yields. But as soon as interest rates start rising faster than expected, it's time to take action – the situation could get dicey.
Kreuzkamp's vision goes beyond this year and right to 2019. He admits that this year, things are expected go well in economic terms: "The economy is churning along nicely, growth is going to stay, digitization is omnipresent. Although debt is a kind of burden, liquidity remains high and inflation subdued," this is how the chief investment strategist summarizes the current situation. However, be aware that all this is already discounted.
The burning question therefore is: what will drive markets in the years to come? Key interest rates are at the top of the agenda. According to Kreuzkamp, they might well rise to three percent in the United States. Although Europe is lagging behind, 2019 could mark the first year since 2011 for the European Central Bank to tighten interest rates.
Inflation will become a major theme, Kreuzkamp believes. His inflation forecast for the United States is 2% and around 1.7% for the Eurozone. Debt is also expected to be a burden: the surge of public-sector debt in the United States and the European Union is expected to continue unabated. The good news: the economy maintains its growth trajectory. Kreuzkamp forecasts global growth at 3.9% for both years, 2018 and 2019.
What does his forecast mean for investing? "The days of plenty on the bond markets are over," Kreuzkamp says. Yields should gradually continue to pick further up, exerting pressure on prices. Bonds should not be shunned but kept in portfolios, as a means of stabilization – they should, however, be hand-picked: floaters could help investors to capitalize on expected rate hikes, and inflation-linked bonds should be a useful means to hedge portfolios. And despite low yields, he still bets on investment-grade corporate bonds. The reason why: high demand is faced with limited supply so that prices should be supported.
But Kreuzkamp is more constructive on equities: "Stock markets are not yet on a diet." Fundamental data is supportive, and global corporate earnings should grow by 15% in 2018 and by 8% in 2019, he believes. Growth is, additionally, broadly based and spread over all regions and sectors. Rate increases by 100 to a maximum of 200 basis points – i.e. one to two percentage points – by the end of 2019 should, in his view, do no harm. Interest rates rising faster or more aggressively than expected could, however, cause some dislocations.
One of Kreuzkamp's favorites: Equities of digitization winners – after the broad-based rally, however, not necessarily the big players any longer. He rather focuses on the second division. High-dividend stocks remain an indispensable basic investment, also as a potential risk cushion, partly mitigating market volatility. Moreover, Kreuzkamp sees significant opportunities in German and European small- and mid-cap and Emerging Market equities, which are expected to perform especially well, with above-average corporate earnings growth – 2018 and 2019 by 15% p.a. – and valuation discounts of 25% versus equities from industrialized countries.
Within alternatives, Kreuzkamp strongly focuses on infrastructure stocks. They should benefit from trends such as a growing world population, urbanization and digitization. Moreover, due to primarily inflation-linked charges, infrastructure companies are less vulnerable to rising inflation.