| Systemic risks and cyclical downturn to dominate in 2012 |
| 17.11.11 16:44 | |
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The current economic downturn will lead to a recession in Switzerland in the first half of 2012. Hence this cyclical outlook does not bolster investors’ appetite for risky assets. Julius Baer’s analysts expect safe havens to remain in favour with investors: quality bonds, gold as a substitute for paper money, and corporate bonds for a more risky diversification. Switzerland heading towards recession and deflation As a result of the global economic downturn and the still overvalued Swiss franc, Switzerland will face a recession and declining prices, i.e. deflation, next year. With demand from emerging markets starting to lose some momentum, it will not be able to fully compensate for the slump in the growth dynamics of the European countries, which represent the most important export market for Switzerland. Despite successful intervention by the SNB, the Swiss franc remains far away from a fair value, estimated to be roughly 1.35 to the euro. Hence beside the weaker economic outlook, this overvaluation represents a huge additional burden for Swiss producers. Furthermore, concerned consumers and cautious investors will slow down domestic demand and thus exacerbate the decline in prices. “Swiss gross domestic product will increase by only a meagre 0.1% in 2012 and be dominated by contraction in the first half of the year, while the average yearly inflation will reach 0.3%,” says Janwillem Acket, Chief Economist of Julius Baer. Europe’s woes to persist in 2012 Julius Baer’s experts do not believe the European sovereign debt crisis will come to an end in 2012. On the one hand, it is encouraging that the European countries are willing to face uncomfortable realities, such as a debt haircut and questioning whether peripheral countries should remain in the eurozone. On the other hand, this new framework will change several conventions which investors and market participants could rely on so far. “The northern and southern European countries are economically and structurally drifting further apart. Nowadays, these countries have the stigma attached that they probably will not be fully able to service their sovereign debt. As the debt problem of the emerging countries in the 1980s and 1990s illustrated, it is going to be a difficult and lengthy process for the European countries to remove this blemish, which can only be successfully achieved through joint and resolute action,” says Janwillem Acket. Overall, economic development in Europe is expected to remain quite mixed – similar to the short recovery phase in 2010/2011. Spain, Italy and smaller countries, which must come to grips with a new policy of strict fiscal consolidation, are expected to slip into yet another recession. But despite an economic downturn in the first half of the year, the eurozone will only move into a stagnation phase and thus barely escape another recession. Slowing global economic growth – impotent fiscal policy Julius Baer’s analysts expect global economic growth to drop to 3.4% in 2012. Whereas developing countries such as China, India and Brazil – which have shown some excessive growth – will be able to prevent economic overheating, industrial countries will continue to struggle with structural deficits that are hampering growth. Due to the increasingly volatile growth patterns, many countries lack room for fiscal policy manoeuvres. Governments of developed countries with debt problems are also increasingly unable to employ countercyclical measures to offset or smooth out weak growth. Instead, they must rely on the central banks, whose monetary policy is unlikely to trigger additional growth effects in view of the restrictive banks and rattled investors. Systemic risks and cyclical downturn The systemic risks in the eurozone and the dysfunctional political situation in the US will remain a drag on financial markets. And the cyclical indicators do not really encourage investors to invest in risky assets in the first half of 2012. Historically, an economic downturn usually led to recurring selling waves on stock exchanges, with short and sharp countermovements. “Safe havens will remain sought after by the global investment community far into the first half of 2012,” explains Christian Gattiker, Chief Strategist and Head Research at Julius Baer. The only solid counter-argument at present in support of increasing risk appetite going forward is the very depressed investor sentiment. In the past, this negative sentiment was the only positive indicator in favour of risky assets, albeit only for the following few weeks, not quarters. Lack of investment alternatives supports risky assets – careful selection needed The financial markets are expected to remain choppy. Nevertheless, due to the lack of choice investors will not get around investing in risky assets. The investment strategists at Julius Baer recommend investing in corporate bonds from companies outside the financial sector, as they allow investors to benefit from their strong balance sheets and the risks are calculable. In the equity sector, they also prefer companies with a solid balance sheet, focusing on those with sustainable dividend payments. Investors willing to take on more risk should consider Chinese A-shares, as they are considered to benefit from the local monetary easing. According to the technical analysis of Bank Julius Baer, gold and biotech stocks are also worth investing in. However, the Baer specialists advise against investing directly in commodities. Cyclical metals might shine later in the year, once the renewed accommodative monetary conditions in China start having an effect on fundamental demand. On the currency side, gold should still be considered as a hedge for paper money, thus representing a ‘shadow currency’. Overall, the most important imperative will be to protect the value of the assets: “Over the next twelve months, we believe one of the main challenges in the asset management business will be to resist the temptation to be a hero,” remarks Christian Gattiker. source: Julius Baer |
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