Investment Traffic Lights

Our tactical and strategic view

Market overview

Now that the capital markets have for the most part weathered the summer months quite well, largely thanks to the U.S., the question is whether October will again live up to its reputation as historically the most volatile month of the year. The stage does seem set for that as optimistic summer markets meet the big political risks of the autumn. For the summer living was indeed easy for the markets. Good economic and corporate figures in September kept the mood sunny and some previously rattled sectors, such as energy and raw materials, as well as a few of the emerging markets , were able to regain their poise. In the U.S. and Japan the equity indices even reached new highs again. But politics began to turn nasty in a September characterized by a series of major storms. The U.S. ratcheted up the trade dispute with China and now levies customs duties on almost half of its imports from China. Contention regarding the nomination of Brett Kavanaugh as a Supreme Court judge has fueled political trench warfare, which we believe could impact voters' choice in the mid-term elections. Meanwhile the German government coalition struggled with its appointments of second-tier officials before Chancellor Merkel surprisingly lost one of her most important followers - Volker Kauder, leader of the Union faction[1] - in a party-internal election. The approval ratings of France's President Emmanuel Macron also continued to lose ground, while in England Prime Minister Theresa May was rebuffed by Brussels for her Brexit plans, which are much criticized in the UK, while the Labour Party surprisingly warmed to the idea of a second referendum. But the biggest political surprise arrived at the end of the month. Italy's government presented a budget plan that envisages a deficit of 2.4% of gross domestic product (GDP) for the next three years. The market reaction across the board, for Italian government bonds and for equities, especially in the banking sector, was clear. The biggest concern is probably not that 2.4% figure, which is not so large, but rather the big defiant signal that Rome is sending to Brussels.

While the political fireworks fired in succession, central banks kept a low profile in September and delivered exactly what the markets had expected. In the case of the European Central Bank (ECB) this was nothing at all and in that of the U.S. Federal Reserve a hike of the federal funds rate by 0.25% to 2-2.25%. Although this might give U.S. yields a brief boost 10-year Treasuries are still struggling to leap over the 3.1% mark. In emerging markets, however, one central bank did launch some spectacular fireworks. The Turkish central bank raised its key interest rates by an enormous 6.25 percentage points to 24%, despite the fact that President Erdoğan has an aversion to interest-rate increases. In this crucial trial of strength the central bank now looks strong – but the economy does not.

Outlook and changes

Political developments are a major driver of the tactical and strategic adjustments we made in September. Before we move on to our new 12-month forecasts, which we set at our quarterly strategy meeting, we will give a brief overview of the tactical changes.

In view of the many important political developments expected in the autumn, we have taken a neutral stance on the majority of our asset classes. In concrete terms, this means we no longer have any regional or sectoral overweights or underweights in equities. We downgraded the information-technology and financial sectors and upgraded the utilities and telecommunications sectors to Neutral. We became more positive on both U.S. and euro investment-grade bonds after the adverse supply/demand picture of the summer months returned to normal. In the case of emerging-market government bonds, we have become somewhat more cautious and therefore returned to Neutral.

The main results of our strategic meeting, the CIO Day, can be summarized quickly. Overall, we remain confident about the global economy and continue to expect no recession in the U.S. within the forecast horizon. At the same time, political risks are high. For the next twelve months, global equities should deliver better returns than fixed-income investments. We expect an average total return of 5% to 9%, but the political imponderables mean we do not favor any particular region or sector for the time being. We do not expect bond yields to shoot up. Despite the recent rise in 10-year U.S. government bond yields we see a peak of only 3.25% in twelve months. The credit spread of U.S. investment-grade bonds is expected to narrow slightly, but high-yield spreads should widen by about 50 basis points . For German Bund yields we have lowered the 12-month target from 1.0% to 0.8%. The euro is expected to remain stable at 1.15 dollars and the Chinese renminbi is expected to fall to 7.00 per dollar. West Texas Intermediate (WTI) oil is expected to fall to $65 per barrel.

Past performance of major financial assets

Total return of major financial assets year-to-date and past month

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 9/28/18

Equities*

1 to 3 months (relative to the MSCI AC World )

until September 2019

Regions

United States

Europe

Eurozone

Germany

Switzerland

United Kingdom (UK)

Emerging markets

Asia ex Japan

Japan

Latin America

Sectors

Consumer staples

Healthcare

Telecommunications

Utilities

Consumer discretionary

Energy

Financials

Industrials

Information technology

Materials

Real estate

Style

United States small caps **

Europe small caps ***

** Relative to the Russell 2000 Index

*** Relative to the Stoxx Europe 600

Fixed Income*

1 to 3 months

until September 2019

Rates

U.S. Treasuries (2-year)

U.S. Treasuries (10-year)

U.S. Treasuries (30-year)

UK Gilts (10-year)

Italy (10-year)1

Spain (10-year)1

German Bunds (2-year)

German Bunds (10-year)

German Bunds (30-year)

Japanese government bonds (2-year)

Japanese government bonds (10-year)

Corporates

U.S. investment grade

U.S. high yield

Euro investment grade1

Euro high yield1

Asia credit

Emerging-market credit

Securitized / specialties

Covered bonds1

U.S. municipal bonds

U.S. mortgage-backed securities

Currencies

EUR vs. USD

USD vs. JPY

EUR vs. GBP

GBP vs. USD

USD vs. CNY

Emerging markets

Emerging-market sovereigns

Alternatives*

1 to 3 months

until September 2019

Infrastructure

Commodities

Real estate (listed)

Real estate (non-listed) APAC

Real estate (non-listed) Europe

Real estate (non-listed) United States

Hedge funds

Comments regarding our tactical and strategic view

Tactical view:

  • The focus of our tactical view for fixed income is on trends in bond prices, not yields.

Strategic view:

  • The focus of our strategic view for sovereign bonds is on yields, not trends in bond prices.

  • For corporates and securitized/specialties bonds, the arrows depict the respective option-adjusted spread.

  • For bonds not denominated in euros, the illustration depicts the spread in comparison with U.S. Treasuries. For bonds denominated in euros, the illustration depicts the spread in comparison with German Bunds.

  • For emerging-market sovereign bonds, the illustration depicts the spread in comparison with U.S. Treasuries.

  • Both spread and yield trends influence the bond value. Investors who aim to profit only from spread trends should hedge against changing interest rates.

Key

The tactical view (one to three months):

  • Positive view

  • Neutral view

  • Negative view

  • A circled traffic light indicates that there is a commentary on the topic.

  • The traffic lights’ history is shown in the small graphs.

The strategic view up to September 2019

Equity indices, exchange rates and alternative investments:

The arrows signal whether we expect to see an upward trend , a sideways trend or a downward trend .

The arrows’ colors illustrate the return opportunities for long-only investors.

  • Positive return potential for long-only investors

  • Limited return opportunity as well as downside risk

  • Negative return potential for long-only investors

Fixed Income:

For sovereign bonds, denotes rising yields, unchanged yields and falling yields.For corporates, securitized/specialties and emerging-market bonds, the arrows depict the option-adjusted spread over U.S. Treasuries: depicts a rising spread, a sideways trend and a falling spread.

The arrows’ colors illustrate the return opportunities for long-only investors.

  • Positive return potential for long-only investors

  • Limited return opportunity as well as downside risk

  • Negative return potential for long-only investors

Footnotes:

* as of 9/28/18

1 Spread over German Bunds in basis points

Appendix: Performance over the past 5 years (12-month periods)

09/13 - 09/14

09/14 - 09/15

09/15 - 09/16

09/16 - 09/17

09/17 - 09/18

UST 30yr

11.60%

8.90%

12.50%

-6.30%

-3.60%

UST 10yr

3.50%

6.20%

5.40%

-3.00%

-3.00%

UK 10yr

4.50%

7.40%

9.90%

-2.70%

0.20%

UST 2yr

0.50%

1.20%

0.90%

0.20%

0.00%

GER 10yr

9.00%

3.90%

6.70%

-3.20%

0.80%

GER 2yr

0.60%

0.10%

0.30%

-0.60%

-0.70%

GER 30yr

15.10%

10.00%

15.50%

-9.70%

3.50%

Japan 2yr

0.20%

0.30%

0.40%

-0.50%

-0.10%

Japan 10yr

2.70%

2.40%

3.70%

-1.20%

-0.20%

EM Sovereign

9.70%

-0.60%

16.20%

4.60%

-1.90%

EM Credit

8.40%

-2.00%

13.30%

5.90%

-1.20%

US HY

7.20%

-3.40%

12.70%

8.90%

3.00%

US IG Corp

6.60%

1.50%

8.30%

2.00%

-1.10%

EUR HY

8.60%

-0.40%

9.70%

7.50%

0.80%

Asia Credit

8.50%

2.80%

10.50%

2.20%

-1.00%

EUR IG Corp

7.70%

-0.50%

7.40%

0.50%

0.00%

Spain 10yr

22.60%

3.20%

10.30%

-1.50%

2.40%

Italy 10yr

20.70%

5.80%

6.80%

-3.30%

-4.50%

MSCI Asia xJ

5.80%

-14.40%

14.00%

20.00%

-0.90%

MSCI EM

1.80%

-21.20%

14.10%

19.70%

-3.10%

MSCI Latam

-4.00%

-40.20%

25.70%

22.50%

-11.70%

S&P 500

17.30%

-2.60%

12.90%

16.20%

15.70%

MSCI Japan

10.50%

5.00%

-7.00%

24.60%

9.10%

SMI

10.10%

-3.60%

-4.40%

12.50%

-0.80%

DAX

10.20%

2.00%

8.80%

22.10%

-4.50%

FTSE 100

2.50%

-8.50%

13.80%

6.90%

1.90%

Stoxx600

10.50%

1.40%

-1.40%

13.20%

-1.30%

Eurostoxx 50

11.50%

-3.90%

-3.20%

19.70%

-5.40%

Past performance is not indicative of future returns.

Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 9/28/18

1. In the German parliament, the Union faction is made up of all members of parliament from the Christian Democratic Union (CDU) and the Christian Social Union (CSU)

CIO View

This website uses cookies in order to improve user experience. If you close this box or continue browsing, we will assume that you are happy with this. For more information about the cookies we use or to find out how you can disable cookies, see our Cookies Notice.

You are now seeing the Italy (en) version of the page despite being located in United States. You can change the country below.

You are about to change the country to United Kingdom despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to South Africa despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Austria despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Switzerland despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Germany despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Singapore despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to France (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Italy (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Belgium despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Spain (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Japan despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Sweden (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Portugal despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Netherlands (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Korea despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Luxembourg despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Hong Kong despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Taiwan despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to United Kingdom despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to South Africa despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Austria despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Switzerland despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Germany despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Singapore despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to France (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Italy (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Belgium despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Spain (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Japan despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Sweden (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Portugal despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Netherlands (en) despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Korea despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Luxembourg despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Hong Kong despite being located in United States. If you still want to change your region, please click here.

You are about to change the country to Taiwan despite being located in United States. If you still want to change your region, please click here.

Other country

Other country