Your questions, our answers
In our latest issue of Clear and Simple, our Portfolio Managers discuss whether they expect a recession in 2020 and which asset classes offer the best performance opportunities in 2020. They then cover their expectations for the development of interest rates and duration in the coming year and outline the positioning of Ethna-DYNAMISCH in terms of the current rotation from growth to value and non-cyclical to cyclical stocks. Finally, they discuss whether a significant change the U.S./Chinese trade dispute can be expected and what, if any, influence the upcoming presidential election might have.
Are we likely to see a recession in 2020? Which asset classes do you believe will offer the most performance opportunities?
In 2019, the global economy experienced a period of weakness. Although the ongoing trade dispute between the U.S. and China is not the only reason for this, it intensified the downturn caused by the already quite advanced economic cycle. The early and decisive intervention of the central banks over the course of this year stabilized the economy and prevented a widespread recession. Their monetary policy measures, such as introducing liquidity and cutting interest rates, should continue to have an effect in 2020. Therefore, provided the uncertainty triggered by the trade dispute continues to ease, we do not expect a recession next year. Instead, we expect a late cycle moderate upswing.
Equity markets, in particular, should benefit from both the aforementioned liquidity and the positive developments in this environment. As such, equities are still very attractive compared to bond yields. If we see a more sustained stabilization in the economy, as we assume in our optimistic scenario, corporate earnings will continue to rise, which will also support the performance of equities. However, we should also see advantages for corporate bonds in this environment due to the potential narrowing of spreads. As we consider the probability of interest rates rising to be relatively low, we believe that fixed-interest securities will also be supported in this environment.
With this in mind, we plan to maintain a significant equity quota in the Ethna-DYNAMISCH in 2020. Equities also represent an attractive performance driver for the Ethna-AKTIV, which means that in this fund we will also continue to have an equity quota appropriate for market conditions. In addition, in both the Ethna-AKTIV and the Ethna-DEFENSIV, we will continue to hold a bond portfolio of high-quality, carefully selected individual securities.
This year, fixed income has made a positive contribution to the performance of the Ethna-AKTIV and the Ethna-DEFENSIV. What do you expect to see in terms of interest rates in 2020? What is your view on duration?
In 2019, the Fed responded to the uncertainties facing the U.S. economy due to the trade dispute by introducing a policy change and, as a result, lowered the Fed Funds rate for a third time. Consequently, we saw a marked drop in yields of long-dated Treasuries. The ECB also lowered its deposit rate and, in November, resumed its asset purchase programme. Thanks to the high weighting of bonds, in particular corporate bonds, in the Ethna-AKTIV and Ethna-DEFENSIV portfolios, we were able to benefit from this. The bond portfolios of both funds made a significant contribution to our impressive YTD performance in 2019. In our allocation, we have focused primarily on large multinational companies with proven business models in the high-quality investment grade area.
The ECB will continue its asset purchases in 2020 under its new president Ms. Lagarde. The Fed will leave its key interest rate unchanged for the time being and will wait for developments in both the U.S. economy and the inflation rate. Despite continued wage increases, inflation rates in the major economic areas such as the U.S. and Europe have recently weakened once more. In this environment, we expect yields on long-term German government bonds and Treasuries to remain low. Therefore, we will continue to have a high duration in the Ethna-AKTIV and Ethna-DEFENSIV portfolios, as this will allow us to achieve positive interest income and price gains through shorter maturities ("rolling down the yield curve" or "yield curve effect"). The robust global economy and excellent financing conditions will continue to support the creditworthiness of the multinational companies in our portfolios. The search by investors for positively yielding investments and the additional purchases by the ECB should lead to a further decline in risk premiums for corporate bonds and, as a result, to further price gains.
What is your view on the current rotation from growth to value stocks and non-cyclical to cyclical stocks?
Economic uncertainties and a further fall in interest rates led to a rapid rise in demand for quality and growth stocks at the beginning of 2019. The stock market is currently discounting the next economic upswing, which will benefit cyclical and value stocks in particular. However, the recent rally in these stocks has to be seen in the context of previous losses. This quickly puts any gains in perspective. Although we are seeing the first signs of an economic stabilisation, it is still too early for widespread euphoria in the markets. For the coming months in the Ethna-DYNAMISCH, we prefer a mix of high-quality equities with both a value and a growth component. Currently, we see little reason to give cyclical stocks a higher weighting and instead prefer quality stocks.
As we are entering the last year of Donald Trump’s presidency, do you expect a significant change in terms of the US/Chinese trade dispute? Do you have a view on how the election could influence the dispute?
The longer-term plan of both President Trump and President Xi is to resolve the question of global economic dominance for the next decades. In order to secure his re-election next year, Trump does not necessarily need a final trade deal, as voters from both political camps in the U.S. are advocating a tough stance towards China. However, President Trump cannot afford to see the U.S. economy hit even harder by the escalating trade dispute. Therefore, in our opinion, the upcoming election is one of the main reasons why the U.S. government is working towards a de-escalation that will stabilize its economy for the time being. However, the U.S. side will only take this stance up to a point. And the increasing demands of the Chinese are designed to ascertain exactly how far the U.S. is prepared to go. Because even if the Chinese economy suffers from the current tariffs, China is not facing comparable pressure to act. Therefore, we do not believe that there will an escalation or that either side will approach the other with major concessions. If a provisional compromise is reached, both sides must be able to save face. Then after the U.S. election, more intense negotiations can continue.
If no new escalation level is reached, we will position the Ethna Funds more offensively, in particular with an increased equity exposure. In the future, we could also imagine increasing the equity exposure of the Ethna-DEFENSIV.
Please contact us at any time if you have questions or suggestions.
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