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2019/04/03 / Erste Group Research

Global Strategy Q2 2019


Trade disputes and country-specific issues dampen the global growth outlook and lead to elevated volatility in financial markets. Central banks have postponed their expected rate hikes and safe haven investments are moreover benefiting from the threat of a hard Brexit. Improving economic data should lend support to risk assets. We are favoring stocks in defensive sectors as well as BB-rated HY bonds and IG hybrid bonds.

Economic Outlook: Recent US economic data were distorted by the government shutdown and the correction in the stock market in Q4. We continue to expect solid GDP growth of 2.3% in 2019 and do not anticipate an economic slump in the US. While a historically low unemployment rate and accelerating wage growth have so far failed to be reflected in a rising inflation rate, there continues to be a risk that this will happen. The outlook for the euro zone in 2019 has deteriorated further and we are forecasting GDP growth of +1.3%. Germany is struggling with structural issues in the automobile sector and Italy is suffering a mild recession. In the event of a hard Brexit, GDP growth in the euro zone would probably decline below 1% in 2019. Due to weak economic growth momentum and the expectation that oil prices will remain tame we expect euro zone headline inflation to recede somewhat to +1.4% (2018: +1.7%).

Bonds: The Federal Reserve has adopted a wait-and-see approach. We expect upcoming economic data to improve and are therefore forecasting a reversal in interest rate expectations in coming months. On account of this scenario we also expect yields on US treasuries to increase. The ECB's monetary policy decisions will depend on incoming data and the central bank has postponed its first rate hike to 2020 at the earliest. The economic slowdown and the prospect of additional liquidity injections (TLTRO3) combined with the uncertainty over Brexit have led to yields on German Bunds diving into negative territory again. An orderly exit of Great Britain from the EU should result in rising yields, in the event of a hard Brext the phase of extremely low yields should last longer. In corporate bonds the potential for a further tightening of spreads in the IG segment as well as in the HY and IG hybrid segments is probably largely exhausted: we recommend primarily IG hybrid and BB-rated HY bonds.

Currencies: We expect that EUR/USD will reach a low in the second quarter and that improving economic data will contribute to a slow appreciation of the euro. The Swiss franc should concurrently weaken slightly against the euro. Should a hard Brexit become inevitable, the dollar and the Swiss franc would rally against the euro; the gold price should be supported as well in this case.

Stocks: Ongoing uncertainty and declining earnings growth momentum have led to rising volatility. Thus we our recommendation is to avoid cyclical sectors and significantly overweight defensive sectors such as health care or consumer staples. We expect global stock market indexes to rise moderately in Q2 amid continuing volatility and deliver a performance at the lower end of a range from 0% to +5%.

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General information

AuthorErste Group Research
Date2019/04/03
Languageen
Product nameGlobal Strategy
Topic in focusCredits/ Corporate bonds, FX, Macro/ Fixed income
Economy in focusAustria, Croatia, Czech Republic, Eurozone, Germany, Hungary, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Switzerland, Turkey, United States
Currency in focusCroatian Kuna, Czech Koruna, Euro, Hungarian Forint, Polish Zloty, Romanian Leu, Serbian dinar, Swiss Franc, Turkish Lira, US Dollar
Sector in focus-
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