Most economic forecasts are not pointing to recession for next year. When do you think it might happen in the US?
No recession is expected in 2020 or even later. Why? Because consumer spending – one side of the equation – is still firm. This is particularly visible in the housing market and in light of the favourable response to the low interest rate environment in the US in the past few months. US consumers have reacted quite positively and should underpin US economic growth next year. As regards the other side of the equation in the US, we expect a strong commitment among both the Republicans and the Democrats to implementing fiscal stimulus ahead of the new presidential mandate in 2021. This should help the Fed pass the baton to the government and smooth the transition from monetary to fiscal policy measures. The first six to nine months of 2020 will be the biggest challenge.
But the timing of Donald Trump's announcement of fiscal stimulus measures when he became president was criticised...
From the end of 2017 and in 2018 President Trump announced tax cuts for corporates and the wealthiest part of the population, and this provided strong stimulus and a big boost for growth in the US. Remember that in 2018 the Fed raised its rates four times. In that sense the Fed’s and the Treasury's actions seemed to be mutually counteractive. In 2019 the effects of the tax stimulus seemed to weaken and US growth started slowing down. This prompted the Fed to stop hiking rates in 2019 and even to cut them back again three times in the second half of the year to support the economy, with the help of its balance sheet expansion. But the Fed deems that further interest rate rises should come with a proper rise in inflation. We do not believe this will happen, but we think the Fed would resume its monetary easing policy should signs of economic slowdown appear or a shock threaten the stability of credit markets.
What about Europe?
The first fiscal stimulus will most likely appear in the UK after the elections. As soon as the Brexit process is clarified, the authorities will quickly take measures to help the economy adapt during the transition out of the EU. That's one side of the equation. The other side will take longer on the continent. This is simply due to the change of leadership at the ECB, with Christine Lagarde taking over, and at the European Commission, where Ursula von der Leyen becomes President, and the current implementation of a system to increase tax and budget flexibility. I think Ms von der Leyen has been very clear on her priorities, especially her investment green deal, for which she seems to have Emmanuel Macron's backing. So we believe that now the ball is rolling changes should start materialising from the middle of 2020.
You expect equities to outperform bonds next year. Which segments of the equity market are you focusing on?
After US equities’ strong performances in the past few years, we believe investors should now begin to broaden their horizons and look outside the US, mainly as the strength of the dollar comes to an end. The dollar exchange rate has been a good indicator of how US equities are going to perform. We believe that, as 2020 approaches, the dollar strength that has prevailed for the past seven or eight years is going to abate and that the greenback is going to go through a period of weakness. The gradual economic recovery outside the US, particularly in Europe, will be a contributing factor. Also, if the UK elections go as we expect, the pound will firm up and the market there will develop. We believe domestic markets in continental Europe will go the same way, albeit not so much in the banking sector and more in small and medium capitalisations. Our preferred strategy is stock picking in Europe to capture the increase in fiscal momentum.
And this despite the weight of recession in manufacturing?
That is exactly why selectivity is key in equities and we are focusing more on small and mid caps.
How do you see Swiss equities?
We are overweight in Swiss equities. They are always expensive compared to European and other ones, but well-managed companies and key technology are a fertile hunting ground for equity investors. Although the European domestic market is picking up as a result of stimulus and European equities (ex Switzerland) are likely to start outperforming the Swiss market, over the long term Swiss equities remain a cornerstone of any portfolio.
For a Swiss investor, which currencies have appreciation potential?
As the effects of the building fiscal momentum start to be felt, in our view Swiss investors should start turning to sterling and the euro and reduce their exposure to the US dollar. We expect the dollar will weaken against the Swiss franc and some European currencies will likely strengthen.
In fixed income, you are positive on emerging markets?
They are attractive mainly due to their valuations. The current challenge is that even when spreads widen, unlike on bonds in dollars or euro, and when the market comes under pressure, emerging countries’ central banks do not have the capacity to intervene the way the ECB and the Fed do to contain a widening in spreads.
What factors should investors pay attention to in the current context for next year then?
There are two risks which investors have perhaps not taken the full measure of. The first is the US money market, which went through a crisis in September and October with repo transactions. The Fed took aggressive action to stabilise it, and it succeeded to some extent. But we feel the issue has not been resolved. There are remaining underlying problems that could re-emerge in an illiquidity phase, starting in December and perhaps also in March–April. We are keeping a close eye on that to ensure some protection. The second risk, I believe, is the fact that investors are not fully factoring in the outcome of the November 2020 US elections. It may seem far away, but in March–April we should have a clearer idea of who the Democratic candidate will be. In our Outlook we have suggested that the least risky result for investors, at least for the first year, would probably be a Donald Trump win rather than Bernie Sanders or Elizabeth Warren as president. Why? Because we believe the risk should emerge later – as when Donald Trump took office and the fiscal stimulus policy was clearly very favourable for investors at large. In our view an election victory for Bernie Sanders or Elizabeth Warren would lead to higher taxes for corporates and wealthy individuals, redistribution, and increased regulation, potentially anti-trust laws, in many booming sectors. This would generate greater instability.
And in Switzerland, do you expect the Swiss National Bank to take a different route than the ECB?
In October the ECB cut its rates to -0.50% while the SNB kept its rates on hold, which was the start of the divergence. The challenge for the SNB will be the economic slowdown with a return of deflationary pressures. Fortunately the franc's rise is moderate. I think the governors of the SNB will wait and see whether the EU can achieve its stimulus objectives in the first half of 2020. If not, the SNB will be more dependent on fiscal measures to try and stabilise the economy. Because pushing rates even further into negative territory will put added pressure on banks.
CIO Wealth Management