Outlook for the global financial markets in the second half of 2013
Switzerland’s economy maintains above-average performance despite the problems in the eurozone – partly thanks to the SNB’s rigorous exchange-rate discipline
Despite challenging conditions, the Swiss economy has come through the first quarter of 2013 with flying colours. Although the European debt crisis hobbled economic momentum in Germany, Switzerland’s most important trading partner, strong domestic consumption enabled the Swiss economy to maintain a healthy rate of growth. However, as long as the eurozone’s emergence from the current recession remains hesitant, the strength of the Swiss franc will continue to impinge on Switzerland’s export industry. Julius Baer does not therefore expect any further economic improvement in Switzerland prior to 2014. As long as deflationary pressures persist, the SNB is also not expected to abandon its lower boundary of 1.20 for the EUR/CHF exchange rate. “The fact that the substantially overvalued Swiss franc has been trading above this floor for quite some time now is a positive signal for the Swiss economy. In the medium term, we expect the currency to normalise towards its fair value of EUR/CHF 1.30,” argues Christian Gattiker, Chief Strategist and Head of Research at Julius Baer.
While crisis in Europe abates, credit crunch keeps growth stalled
The eurozone debt crisis continues to ease. Many countries in the monetary union have now reduced their structural imbalances and are thus considerably more solidly positioned than they were before the crisis. The drawback to these austerity measures is a dramatically increased unemployment rate which is now threatening political and social stability in several peripheral countries in the eurozone. Julius Baer’s analysts believe that growth will also remain weak in the second half year of 2013. Given that backdrop, a slight improvement in economic output – supported by an improved purchasing power effect thanks to low inflation, moderate oil prices and a marginal uptick in external demand – would thus already constitute an optimistic scenario.
Nevertheless, the credit crunch remains the biggest impediment to growth in Europe – especially in the peripheral countries. Since many financial institutions are weakly capitalised, they are continuing to reduce their lending – despite the very attractive funding available to them. Hopes for the medium term are mainly pinned to a banking union, with a common supervisory function and effective resolution mechanisms for dealing with troubled banks, as a means of restoring structural strength to the eurozone’s banking system.
Global economy lacks momentum
Although the prospects for growth are considerably rosier outside Europe, economic momentum in the US as well as in Japan and China is also constrained by high levels of debt. As a result, monetary policy will remain expansionary on a global level, not least because of the indirect consequences arising from the politically motivated ambitions of the Bank of Japan to do whatever it takes to put a stop to the deflationary trends in its own country. By devaluing the yen massively, Japan is exporting its deflation risks to the rest of the world, thus forcing the central banks of most of its trading partners to maintain a loose monetary stance. Muted overall demand from the world economy is an increasing burden on emerging markets, though China and Asia’s other rapidly developing economies still continue to lead the economic cycle. US monetary policy, meanwhile, is seen as increasingly difficult to predict and thus a potential cause for concern. There are mounting fears that initial successes in boosting growth might prompt the Fed to stop its government bond purchasing programme. “While we do not expect this before 2014 at the earliest, that does not rule out a gradual increase in US Treasury yields beforehand,” says Christian Gattiker.
Cautious spring fever among investors – watershed to a new era?
With the exception of gold and fixed-income investments, the past more than ten years have been a single, long “investment ice age”, characterised by low growth, substantial downward pressure on prices and meagre returns. Over the past few weeks, however, an incipient spring fever has started to take hold. Should this long cycle now really be coming to an end, yields and growth rates are expected to normalise further. Indeed the gold price, conversely, has already experienced a substantial correction.
Nevertheless, investors’ reluctance to adjust their compasses to a new era is understandably great: gold, US Treasuries, German Bunds or the Swiss franc are currently all unattractive investments – but who wants to exit from these familiar investment areas which have offered stability during the crises which have characterised the last five years? Investors today are facing a psychological dilemma, as alternatives are no longer cheap. To generate returns – indeed just to protect the purchasing power of their existing wealth – over the next few months investors will have to examine alternatives, all of which involve greater levels of risk. Often, theme-oriented investments help provide a useful means of trying out new ideas. The Julius Baer investment specialists see five different possibilities: 1) China’s offshore currency, the CNH (or bonds denominated in it), which is now on its way to becoming the world’s new reserve currency, 2) shares in asset management firms that have initiated a long-term shift towards a more stable strategy, 3) “nifty fifty” stocks, i.e. shares in the world’s 50 fastest-growing companies, 4) some forms of corporate fixed-income investment, such as high-yield bonds or convertible bonds, and 5) platinum or palladium for all those investors who prefer to stay invested in precious metals after having sold some of their gold positions.