Investment traffic lights - 03 July 2018

General market overview

Whenever you hope that you can safely ignore the Twitter account of U.S. President Donald Trump for a few days, markets quickly make you realize the error of your ways. In June, the U.S. President kept blasting free trade, among his many targets. Eventually, that became too much for both the governments of America's trading partners and market participants. We are also beginning to worry about the World Trade Organization (WTO) as well as about the rules that underlie international trade and global value chains. To make matters worse, the Trump administration is experiencing less and less resistance from the Congress, the courts or his own party. At least, some companies are finally warning about the dangers of protectionism. China, Canada and Mexico also dislike Trump's trade measures and have reacted with immediate retaliatory strikes. The European Union recently threatened to impose punitive tariffs on U.S. goods worth $300 billion, if Trump were to impose fines for European car exports. But while Europe is united on trade, some European politicians are increasingly using exaggerated demands and threats to their own partners as a political instrument. Rome's new government and the Bavarian CSU, for example, have recently played their part in ensuring that political risks keep stock markets on the edge.

This has been reflected in the market events of June. Most stock indices fell; the S&P 500 only rose by 0.6%, despite continuing good U.S. macro figures. For bonds, the month was divided into two halves. At first, yields rose before they then fell back again. It remains to be seen whether this was due to political concerns or more cautious assumptions regarding medium-term growth prospects. Both June and the year-to-date have performed poorly in some of the asset classes favored by many professional investors: Asian emerging markets (some Chinese equity indices are already in correction mode, having lost 20% since their highs), financials and European equities. By contrast, the spike in the oil price and the regained strength of U.S. technology stocks came as a surprise.

Outlook and changes

This month, the investment lights again follow right on the heels of our quarterly strategy conference. In June, we largely confirmed our economic forecasts for the next 12 months. Overall, we remain confident and continue to expect global economic GDP growth of 3.9% in 2018 and 2019. However, we have become more cautious with regard to return expectations. For the first time in quite a while, we have left our price targets largely unchanged for most equity indices. This time, we also did not raise our 12-month forecasts for 10- and 30-year government-bond yields. We continue to expect a yield of 3.25% for 10-year U.S. Treasuries in June 2019. As we continue to expect a slight increase on 2-year government-bond yields, this means a further flattening of the yield curve. Nevertheless, we do not expect an inversion, which could increase recession fears. Despite the strong performance of U.S. technology and other growth stocks in the first half of the year, we still expect these sectors to continue to drive the market in the future. Of course, temporary setbacks cannot be ruled out!

From a tactical point of view, we no longer have any regional preferences, apart from Asia's emerging markets. We have upgraded the United States to neutral, whereas we have downgraded Germany and the overall emerging markets to neutral. For the summer months, however, we expect stronger market fluctuations, which we intend to take advantage of in the short term.

In government bonds, we see a tactical risk of a renewed rise in 10- and 30-year U.S. yields, as well as in 10-year British yields. We have therefore changed our assessment of all three from neutral to negative. By contrast, we have moved 10- and 30-year German Bunds back to neutral, as we cannot rule out that they will be in demand again in the event of further political eruptions in Europe. Despite this risk, we have raised European high-yield bonds back to positive, in light of recent significant falls in their prices. That said, the market remains difficult for the time being.

The only two other tactical changes we made in June concern currencies. We have upgraded the euro/dollar to neutral again. We see the strengths and weaknesses of the dollar well represented in the current exchange rate, while there are currently no technical signals for a change of direction. However, we expect the dollar to strengthen further in the dollar/renminbi pair.

Equities*
	1 to 3 months (relative to the MSCI AC World)	until June 2019
Region
United States
Europe
Eurozone
Germany
Switzerland
United Kingdom (UK)
Emerging markets
Asia ex Japan
Japan
Latin America
Sectors
Consumer staples
Healthcare
Telecommunications
Utilities
Consumer discretionary
Energy
Financials
Industrials
Information technology
Materials
Real estate
Style
U.S. small cap
European small cap

Fixed Income*
	1 to 3 months	until June 2019
Rates
U.S. Treasuries (2-year)
U.S. Treasuries (10-year)
U.S. Treasuries (30-year)
UK Gilts (10-year)
Italy (10-year)1
Spain (10-year)1
German Bunds (2-year)
German Bunds (10-year)
German Bunds (30-year)
Japanese government bonds (2-year)
Japanese government bonds (10-year)
Corporates
U.S. investment grade
U.S. high yield
Euro investment grade1
Euro high yield1
Asia credit
Emerging-market credit
Securitized/specialties
Covered bonds1
U.S. municipal bonds
U.S. mortgage-backed securities
Currencies
EUR vs. USD
USD vs. JPY
EUR vs. GBP
GBP vs. USD
USD vs. CNY
Emerging markets
Emerging-market sovereigns

Alternatives*
	1 to 3 months	until June 2019
Infrastructure
Commodities
Real estate (listed)
Real estate (non-listed) APAC
Real estate (non-listed) Europe
Real estate (non-listed) United States
Hedge funds

Comments regarding our tactical and strategic view

Tactical view:

- The focus of our tactical view for fixed income is on trends in bond prices, not yields.

Strategic view:

- The focus of our strategic view for sovereign bonds is on yields, not trends in bond prices.

- For corporates and securitized/specialties bonds, the arrows depict the respective option-adjusted spread.

- For bonds not denominated in euros, the illustration depicts the spread in comparison with U.S. Treasuries. For bonds denominated in euros, the illustration depicts the spread in comparison with German Bunds.

- For emerging-market sovereign bonds, the illustration depicts the spread in comparison with U.S. Treasuries.

- Both spread and yield trends influence the bond value. Investors who aim to profit only from spread trends should hedge against changing interest rates.

Key

The tactical view (one to three months):

-  Positive view

-  Neutral view

-  Negative view

The strategic view up to June 2019

Equity indices, exchange rates and alternative investments:

The arrows signal whether we expect to see an upward trend , a sideways trend   or a downward trend .

The arrows’ colors illustrate the return opportunities for long-only investors.

 Positive return potential for long-only investors

 Limited return opportunity as well as downside risk

 Negative return potential for long-only investors

Fixed Income:

For sovereign bonds, denotes rising yields, unchanged yields and falling yields. For corporates, securitized/specialties and emerging-market bonds, the arrows depict the option-adjusted spread over U.S. Treasuries: depicts a rising spread, a sideways trend and a falling spread.

The arrows’ colors illustrate the return opportunities for long-only investors.

 Positive return potential for long-only investors

 Limited return opportunity as well as downside risk

 Negative return potential for long-only investors

Footnotes:

* - as of 6/29/18

1 - Spread over German Bunds in basis points