Bank J. Safra Sarasin explains the global economic outlook and investment strategy for the rest of 2014. According to the bank, equities remain the most attractive asset class mid-term, in particular Emerging Markets have further catch-up potential. “Earnings growth is likely to replace higher valuations as the main driver for share prices in the near future: Equity markets could still overshoot. We see the biggest opportunities in Japan and emerging market countries”, says Philipp E. Baertschi, Chief Investment Officer Private Clients.
The bank thinks that the economic recovery continues, but at varying speeds; the US leads the global cycle with growth significantly higher than in Euroland.
Euroland is hampered by high debt levels, ongoing economic imbalances, adverse geopolitical headwinds like the crisis in Ukraine and the urgent need for structural reforms.
Inflation remains low globally, preventing a premature increase of policy rates and a bond market crash. The spectre of deflation is particularly strong in Euroland and needs to be addressed by demand and supply side policies. “Excessively low inflation impedes structural change and puts extra pressure on leverage to households and companies. Wages and inflation need to be significantly higher in the most competitive Euro area countries to meet the ECB’s definition of price stability and to rebalance the Euro area. Structural reforms that strengthen the growth potential are necessary, but a declining acceptance of economic policies that are needed for a sustainable currency union and the risk of adverse political developments are now greater than those originating in financial markets”, comments Karsten Junius, Chief Economist.
Interest rate hikes are forecasted in the USA/UK in 2015 while the monetary policy of the European Central Bank is expected to become even more expansionary. As a result, bond yields are likely to rise, with the curve to remain stable in US and steepen in Euroland. The US dollar is expected to strengthen against the Euro and Swiss Franc.
With regard to Switzerland, the Bank’s experts make the following observations: Economic indicators are pointing to solid growth – based on strong consumption, high employment, low interest rates and strong credit growth; SNB monetary policy is tied to the ECB’s policy and the SNB is expected to defend success- fully the CHF 1.20 floor against the Euro – if necessary also by lower interest rates; the main risk remains the overheating of the housing sector; GDP forecast for 2014 is 1.6%, and for 2015 is 1.8%.