Deutsche Bank Capital Markets Outlook 2019

28 november 2018

A world in which many of the major economies have passed their growth peak and uncertainty continues to increase – these are the headline forecasts in Deutsche Bank’s Capital Markets Outlook 2019, published in Frankfurt today. While the eurozone and many emerging markets are likely to experience an economic slowdown in the coming year, negative political stress factors will drive the sharpest market reactions. “In Europe we will remain preoccupied by the budget conflict with Italy and concerns about a disorderly Brexit,” said Stefan Schneider, Chief German Economist at Deutsche Bank Research. Until the ink dries on a withdrawal agreement between the UK and the European Union, there is unlikely to be any sustained easing of tensions. In addition, Italy is clinging on to its plans for a budget that contravenes EU rules. This puts the country's rating in jeopardy and thus also the stability of the entire eurozone. “Italy remains a serious problem and continues to keep European bond markets on edge,” concluded Schneider.

Added to this is the global trade dispute between the US and China. “This trade conflict may increasingly morph into a battle for economic and technological market leadership. It's essentially about who’s going to set the standards,” explained Ulrich Stephan, Chief Investment Officer at Deutsche Bank’s Private & Commercial Bank. There are still hopes, however, that at a meeting scheduled for November 29, 2018, ahead of the G20 summit in Buenos Aires, a compromise could be reached between the US President Donald Trump and the Chinese President Xi. A global economic downturn is not to be expected despite the challenges.

Schneider expects a slight increase in inflation in 2019. This would likely prompt central banks – first and foremost the US Federal Reserve and the European Central Bank (ECB) – to further rein in their expansionary monetary policy. Higher interest rates would be the consequence.

Business cycle – no signs of a recession

While it will remain full steam ahead for the US economy, growth rates in most other major economic regions will slow in 2019 compared with 2018. “We are lesssceptical than the market. There is no prospect of a global recession in the coming year”, said Stephan. He is forecasting global growth of 3.8 percent. The growth cycle which began in 2009 has thus lasted roughly ten years.

Europe: solid growth

Despite major political challenges, Deutsche Bank expects the eurozone economy to largely continue on its growth trend next year. Although the Composite Purchasing Managers Index has fallen recently, the reading above the 50 point mark suggests that there will be further growth. The expected slight tightening of monetary policy in the eurozone, for instance by planning to end the bond purchasing programme in January 2019, is thus likely to be justified and should not put an end to the growth momentum. “The very prudent action taken by the ECB provides reason to hope that its deposit rate hike for banks that is expected in late summer of 2019 will not have any major negative consequences for credit growth in the eurozone”, said Stephan. Deutsche Bank forecasts annual economic growth in 2019 of 1.3 percent for Germany and 1.7 percent for the eurozone.

USA: robust growth to continue

The outlook for the US economy remains healthy. At 2.8 percent, growth in 2019 should be approximately as strong as in the current year. “The main drivers are the effects of the US tax reform and higher public expenditure,” explained Schneider. High private consumption and generally solid capital expenditure will support the trend. By contrast, economic growth could be dampened by potentially more restrictive financing conditions. “We expect the Fed to have made five rate hikes by the end of 2019 and that the key interest rate will then be 3.25 to 3.5 percent,” says Schneider.

Currencies – the search for a “safe haven”

Although global capital markets remain in thrall to the dominance of the US dollar, the twin deficits the combination of the fiscal and current account deficits) of the United States could weigh on confidence in the greenback in future. For the euro to rise all doubts regarding the continued existence of the European Monetary Union would first have to be dispelled. As long as political risks exist in Europe, the euro should remain under pressure. Only if there is progress on topics such as Brexit and the Italian budget would it be expected to strengthen. “As of end-2019 I expect a EUR/USD exchange rate of 1.15,” said Stephan. The Chinese renminbi is ailing due to the trade dispute and the narrowing of the current account deficit. The renminbi can therefore be expected to weaken in 2019.

Bonds – free of charge is still too expensive

Fixed-income investors are unlikely to see any improvements in the situation in the coming year. On the contrary, bond yields can be expected to continue rising in the US and the eurozone as a result of a generally positive economic development. By September 2019 the yields on US government bonds should therefore continue to grow across all maturities. Only after that are we likely to see yields drop slightly on account of the approaching economic slowdown. “I expect capital market rates to rise, not only in the USA, but also in the eurozone”, said Stephan. Ten-year German Bunds should rise gradually to slightly above  1 percent by year-end. This means there is hardly any money to be made in eurozone bond markets in 2019. “The environment remains difficult. Returns on bonds can only be earned by accepting risk,” said Stephan. Emerging markets for example will offer comparatively high yields, but they are particularly susceptible to currency fluctuations. “If the Fed raises its rates, the bonds issued by many emerging markets will remain under pressure – especially those denominated in local currency,” said Stephan. In the portfolio context, nevertheless, bonds play a major role in diversifying and controlling overall risk. The bonds preferred for this have short maturities or variable interest rates.

Equities – good in the USA, inexpensive in Europe, good and inexpensive in Asia

Stock market investors became more nervous in 2018