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The term “Coronacession” has been created as a chimaera of corona and recession. The central question is how deep the emergency runs. As dramatic as the containment measures against the virus are, as comprehensive is the support aimed at avoiding a depression (i.e. a persistent, severe recession). 

In order to be able to make any predictions, it is worth drawing up different scenarios.

• Scenario 1: after the slump in the first half, the economy recovers in the second half of the year. The measures taken to contain the virus are being reduced, and the ones taken to limit second-round effects have been successful. The economy follows a V-shaped growth pattern. In this case, equities are the optimal form of investment.
• Scenario 2: the economy is recovering slowly, because the effectiveness of the economic policies is limited.  The sentiment remains subdued and dampens investments, consumption, and the labour market. The recovery will only take hold in 2021. This is a U scenario, because the slump is not a gorge but a valley. This scenario suggests a mixed (i.e. broadly diversified) portfolio.
• Scenario 3: no recovery in the foreseeable future. The measures taken in an effort to contain the virus may take longer than expected, and the support may not be sufficiently effective. This is an L scenario, where the investment product of choice are investment grade investments (i.e. government bonds).

Disclaimer:

Forecasts are no reliable indicator for future developments.

Since this is a blog, we do not update the data and facts of the respective entries. They are in line with our knowledge at the time of going to press. For the current data and facts in connection with funds, please refer to the information in the section “Reporting”.

Stock exchanges are usually seen as leading indicators of economic developments, and they are currently close to their all-time highs, or have indeed passed them. By contrast, the prices of credit-safe bonds have fallen from their all-time high at the beginning of September.

The reason for the current rally at the end of the year: The global economy has become more likely to go through a period of mild recovery in 2020. Some economic indicators suggest that the global economy is not running as flawlessly as it used to do, but we are far from a recession. Private consumption and the low unemployment are supporting the global economy. Inflation remains low and “under control”. The international central banks loosened their monetary and interest rate policy in order to prevent the economy from weakening.

The stock exchanges reflect the optimism about the future course of the economy. Optimism outweighs uncertainty, and that is good for the capital markets. The perceived likelihood of an agreement in the trade conflict between the USA and China continues to make a case for equities as attractive investments in 2020. Erste Asset Management sees the return potential (dividend included) bandwidth of 6-8%. In the equity segment, the Erste Asset Management fund managers regard Asian equities as particularly promising, while also expecting good performances from the stock exchanges in the USA, Europe, Japan, and the CEE emerging markets. As far as sectors are concerned, the focus is on raw materials, industrials, consumer goods, and financials.

The fact that the equity bull market has been going on for over a decade now, has brought investors above-average profits over the years. The alternatives to equities are rare, with the exception of high yield corporate bonds in the euro zone and the USA, as well as emerging market bonds.

Disclaimer:

Forecasts are not reliable indicators for future developments.

The German economy’s euphoria seems to have subsided for the time being, but the mood among executives remains good overall, according to the Centre for European Economic Research’s (ZEW) and the Munich-based ifo Institute’s sentiment indicators that were published this week. The survey-based indices that are highly regarded in the financial markets experienced a slight drop from their high levels in February.

At the ZEW, the barometer for economic outlook fell by 2.6 points compared with the previous month and now stands at 17.8 units, with January still marking its highest level since May 2017. The ifo Institute’s Business Climate Index also fell a little to 115.4 units in February after a record high of 117.6 units at the turn of the year.

While the ZEW asks several hundred financial experts for an assessment of the German economy on a monthly basis, the ifo Institute surveys 7,000 managers from German companies. In addition, the ZEW barometer, published two days before the ifo survey, is an important indicator for the latter’s results.

German economy curbs its enthusiasm

Although economists had expected the ifo index to decline less sharply, market reactions were fairly calm: in view of the German economy’s recent strong momentum, market observers saw little room for increases, and so the economic barometer’s slight drop came as no surprise. “The German economy is curbing its enthusiasm,” ifo President Clemens Fuest commented on the figures. However, the ifo experts do not see a reversal of the positive trend.

There are several reasons for the subdued mood. Firstly, a strong euro put a damper on Germany’s export prospects – in recent years, high exports have contributed significantly to the country's economic growth. Add to this the turbulent stock markets in recent weeks, rising key interest rates in the US and US President Donald Trump’s controversial trade policy.

SPD members vote on coalition pact by 2 March

German politics is another uncertainty factor, as the coalition pact barely deals with topics relevant to companies, such as a tax reform, the ifo experts said. Moreover, it is still unclear whether a grand coalition between the CDU/CSU and the SPD will even come about. This depends on the 463,723 party members of the Social Democrats voting on the agreed coalition pact, whose decision will determine by 2 March whether the SPD should participate in the German government again or not. If at least 20 per cent of the members vote, the result for the acceptance or rejection of the coalition is binding for the party's executive committee.

Disclaimer:

Forecasts are no reliable indicator for future developments.

The Chinese economy is still booming for the time being. In 2017, the People's Republic's gross domestic product grew by 6.9 per cent – more than in the previous year. Chinese economic planners foresee similar numbers for 2018, expecting GDP growth of between 6.5 and 6.8 per cent, while the International Monetary Fund’s (IMF) growth forecast is 6.6 per cent. Foreign trade also continues to show robust development. In January, exports increased by around 11 per cent (to 200.52bn USD), while imports increased by nearly 37 per cent.

However, one uncertainty factor for China’s economy is the ongoing trade dispute with the US, which has steadily been escalating over the past few weeks. Following the imposition of punitive tariffs on certain stainless steel products (174 per cent), solar panels (30 per cent) and washing machines (up to 50 per cent) from China in January, the past week saw further actions taken in line with President Trump’s protectionist “America First” strategy. On Wednesday, the US Department of Commerce passed protective duties of up to 109 per cent on cast-iron subsurface pipes; the day before, accessories for larger welded pipes from China had already been subjected to punitive tariffs of up to 132 per cent. In addition, Trump threatened to impose punitive taxes on Chinese steel and aluminium.

US want to reduce trade deficit with China

The measures do not only affect China, but also Canada, Greece, Turkey, India and South Korea. However, the US’s declared goal is to ensure more “balance” in trade deals with China, as the trade deficit with the People's Republic is growing, with far more goods currently being sold from China to the USA than vice versa. For China, this means a trade surplus with the US which has grown by around nine per cent to just under 278bn USD in 2017, making the US the largest contributor to China’s surplus. While this figure dropped by 17 per cent to just under 423bn USD in 2017, it is still quite high.

This bothers not only the US. France has recently also called on China to reduce its surplus and provide better access to the Chinese market for European companies. China’s trade surplus with all EU countries combined decreased by around four per cent in 2017.

In response to the US punitive tariffs, China is conducting anti-dumping investigations in the agricultural sector. Specifically, subsidies for importing millet from the US to China are being targeted. In 2017, the US exported 4.76m tonnes of millet to China, the vast majority of the total 5m tonnes of millet imported by China. According to the Chinese Ministry of Economy, there are indications that prices are below market level – which harms domestic producers. The investigation could have great impact on the US agricultural industry, as China is the largest buyer of US-grown millet and soybeans.

Disclaimer:

Forecasts are no reliable indicator for future developments.

The US reporting season for the final quarter of 2017 is drawing to a close just as the stock markets remain in upheaval. All eyes are focused on the US tax reform, which has begun to leave traces in the results.

Shortly before the turn of the year, the reform just so passed US Congress and was signed by President Donald Trump. Its core element is the reduction of corporate tax from 35 to 21 per cent. At the same time, a one-off levy between 8 and 15.5 per cent on earnings parked abroad was approved. While assets held abroad by companies are already taxed with 35 per cent, the tax was only due when the money was retrieved to the US. Consequently, multinational corporations such as Apple and Microsoft stashed large amounts of money abroad. Those assets are now being taxed with a one-off levy, regardless of whether the money is being repatriated or not.

For some companies, this charge already constituted a large item on the balance sheet for Q4 of 2017, pushing the balance into the red. For example, Microsoft claimed a 13.8bn one-off item in connection with the tax reform, causing a loss of roughly six billion. Intel also slipped into the red due to the extraordinary tax. On the other hand, Apple finished 2017 strongly despite the additional burden and posted a record profit of 20bn dollars thanks to the iPhone X.

Bank shares suffer from lower loss carry forwards

US bank shares were initially also among the losers following the tax reform, suffering not only from the one-off levy on foreign assets, but also from the fact that, due to the lower tax rate, past losses (loss carry forwards) – for example from the financial crisis – can no longer be used as extensively to reduce the tax burden.

As a result, Goldman Sachs and Citigroup posted substantial quarterly losses, while Morgan Stanley and the Bank of America suffered a sharp drop in profits. In the longer term, however, the financial sector expects the tax reform to have a positive impact on earnings, so that the banks’ respective boards were optimistic for the current financial year when presenting their balance sheets.

However, telecom shares such as AT&T and Verizon benefitted instantaneously from the lowered tax, as their business is largely limited to the US, posting extraordinary revenues of billions in Q4. Similarly, Chevron and ExxonMobil oil shares benefitted handsomely from the tax reform.

Disclaimer:

Forecasts are no reliable indicator for future developments