World economic growth will slow next year, says Verwaltungs und PrivatBank Aktiengesellschaft (VP Bank), due to a sluggish expansion in the industrialized economies. Asia will continue to outperform the rest of the world, while growth will shift to the region’s domestic economies. The bank advises that stock market investors should position their portfolios accordingly.
With interest rate risks rising across the globe, the bank also recommends shorter duration bonds and favors spread products over sovereigns fiscal consolidation remains in the early stages in many vulnerable countries. Also expected is the appreciation of key Asian currencies against the Dollar, at least in real terms.
The global economy has continued to recover in 2010; most financial markets will close the year up from their opening levels. In 2011, fiscal consolidation and the structural problems in housing and labor markets will slow growth in many industrialised countries.
However, the US could again outperform the Eurozone. The fiscal problems and structural weaknesses in the European periphery, combined with slower growth in Germany on account of less dynamic exports and fiscal tightening, have continued to drag Eurozone growth down.
The bank also forecasts that Asian economies will outperform the rest of the world. Rising personal incomes, structural reforms and stronger currencies in some cases will boost domestic growth, while external demand for Asian goods and services may disappoint. The bank’s view is that import demand from Asia is not large enough to boost growth in the US and Europe. In those stock markets, VP Bank favors firms with a large exposure to emerging markets, and recommends investing in domestically oriented businesses in Asia.
The main risks to VP Bank’s outlook are on the upside:
- German consumer confidence and possible wage increases could spur growth in private consumption.
- Capital investments are strong for the current stage of the cycle. This could lead to higher productivity and job growth sooner than is currently anticipated.
A premature exit from financial support to the European periphery is currently the main downside risk to the outlook, says VP.
Upgrading Emerging Market Exposure
Within this environment, the bank anticipates further stock market gains in 2011. It expects Asian markets to outperform their peers, and, preferring domestically oriented sectors over exporters, VP Bank suggests a tactical overweight over benchmark.
- Bonds are expensive and vulnerable to a correction, so short maturities are preferable, advises VP. Interest rate risks are rising.
- Fiscal outlooks are uncertain in a number of countries (as debt sustainability issues can only be resolved in the medium term).
Within the bond universe, VP Bank favors issues from emerging markets and the corporate sector. Financial and balance sheet indicators are strong; risk premiums are attractive. However, further policy rate hikes by a number of Asian central banks may put upward pressure on selected local currency emerging market bond yields. Some alternative investments offer interesting risk returns profiles and may be able to help diversify a balanced portfolio, advises the Bank.