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12 months in 12 months' time

Where capital markets stand in 12 months will depend on expectations then and not today's expectations. But we can be reasonably certain that central bank support will fade.

" We are still on the dance floor. But we move more slowly, like a turtle. "

“Nobody over the last fifty years, not the International Monetary Fund (IMF), not the U.S. Treasury, has predicted any of the recessions a year in advance, never.”1 Don’t worry! I do not quote Lawrence Summers to indicate that I believe a recession is coming. Our recent strategy meeting has not changed our expectations for accelerated global growth in 2016. Nevertheless, this statement came to my mind during this meeting where we usually issue our 12-month forecast – a particularly challenging task this time because we expect the key market driver, official rates, to be disrupted. Within these twelve months we are likely to experience the first interest-rate hike by the Federal Reserve (Fed). After these twelve months, we might experience a policy reversal by the European Central Bank (ECB). The point is: Where equities and rates stand in June 2016, does not depend on the economy and central-bank action until June 2016 but on the markets' expectations for the quarters to come. Although everyone knows that investors always anticipate, it does not cease to surprise people. Just take quantitative easing (QE): Almost in an act of defiance, euro periphery spreads widened, exactly when the ECB started its asset purchases in March. Bunds at least waited for a two week grace period before tumbling. European equities weakened from April onwards.

What counts are expectations not facts. So where will we stand one year from now? Which current expectations will become facts, and what could we expect then? The Fed should have cautiously hiked interest rates by then, while the ECB might start to think about continuing, suspending or tapering QE in September. Tailwinds from the central banks could thus turn into gentle headwinds. The U.S. dollar should have peaked, and all eyes will be set on the U.S. economy and signs of a slower pace or shift in direction. This could support the euro unless it still suffers from the effects of a half-baked solution to the Greek crisis. If the European labor market continues to improve alongside that of the United States, fears of inflation might emerge again, and also be fueled by a Chinese economic rebound. There is also the possibility that everything could point to lower potential and economic growth in the industrial states by then.

Compared to our current 12-month view, the outlook in twelve months' time will be gloomier, at least from the standpoint of support by central bank policies, and as for economic growth, it will be neutral at best. As a result, our yield forecasts are rather modest. In face of continuing risks such as Grexit, Brexit, rising interest rates, ISIS and the Ukraine conflict, nobody could be blamed for increasing cash positions – and to stop dancing before the last tone fades away. But as for the time being we still like moderate yields and economic growth rates, we will keep dancing. But at a slower pace, like a turtle.


1 Lawrence Summers at the World Economic Forum in Davos, 1/22/15

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