Continued weakness in global economic growth and the unabated flood of money being made available by central banks will remain the key drivers for financial markets in the second half year of 2013, according to analysts at Julius Baer.
Julius Baer said in its global financial markets outlook for the second half of 2013, that as long as interest rates remain at record-low levels, the quest for higher returns necessarily requires a willingness to assume greater risks. Julius Baer’s analysts see the biggest potential in theme-oriented investments and recommend that investors explore new avenues.
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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, says Julius Baer.
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.
"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," said Christian Gattiker, chief strategist and head of research at Julius Baer.
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By GlobalDataCredit crunch issues continue
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, according to Julius Baer. 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.
US and Japan forecasts
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," said Gattiker.
Ice age thawing
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, said Julius Baer.
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.
