Equity markets are starting 2020 on an optimistic note. Investors are celebrating the preliminary US-China trade deal and equities are trading at record highs. Investment Officer asked three prominent investors representing global asset managers for their views. Today, we ask Stefan Kreuzkamp, CIO of DWS.
“Last year markets had priced in the persistence of political problems in Europe and a fully-fledged escalation of the US-China trade war, as well as a withdrawal of central bank liquidity. But markets now assume the peak of pessimism is behind us, and I think they are right. A phase one trade agreement, which will freeze the current tariff situation as it is, is on the way. Trump needs a picture showing him and Xi signing a trade agreement so he can claim a success. That would be a major step towards re-election. And mind you, the trade war has not been effective, in the sense that it has not boosted exports. Exports from the US are now at their lowest since 2008. And China has not even fully reacted because they have more to lose than to win. So that’s why I think we will see no further escalation. But the long-term conflict about tech supremacy will continue.
I also believe US tariffs on German cars can be avoided, which would make markets celebrate. Trump has nothing to gain from opening a new front in the trade war, since he can’t expect the Fed to help him this time by cutting rates. I expect the Fed to be on hold until the presidential elections, because it doesn’t want to be regarded as helping Trump. Other than balance sheet extension I don’t think they will do anything. In Europe, I don’t expect much action either. Madame Lagarde will not cut the front end of the curve further.”
High valuations don’t hold equities back
“Equity valuations are above the long-term average now. But low interest rate support this. We expect earnings growth to increase to 6% by the end of 2020, and in Europe it could even be higher. It’s still too early to make the call that European equities will outperform the US, but for the first time in six or seven years they have at least as good an earnings potential. I believe we have seen the peak in the valuation gap between growth and value. Therefore, for growth to outperform again we would need to see superior earnings growth. I don’t see that happen for US growth companies in 2020.
Value outperformance, on the other hand, would require higher growth, higher interest rates, or a brighter macro outlook. I don’t see that happen either, so it’s still too early for a value overweight. We are overweight IT and global financials, US banks and Asian insurance companies. This is the high beta value stuff. On the other hand we avoid bond proxies, real estate and utilities as we don’t see interest rates hitting new lows.”