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.

Between euphoria and inertia

We have stock indices approaching record levels, oil prices stabilizing, summer worries like Brexit, China and Italy off the table, and now, after the tremendous generosity of the central banks, governments may even start tapping their fiscal cornucopia. Shouldn’t this be cause for euphoria, particularly when we know that it’s skepticism fueling this rally and not euphoria?

We recommend taking a sober approach in this environment, and we explain why in our current CIO View. Economic growth remains modest, especially in the developed markets , which is the reason many central banks are still hoping for government support. Governments, on the other hand, appear to be having a hard time with reforms and may much rather hand out money. This comes on top of an uncertain political environment, even in developed markets. Brexit is not yet a done deal and is slowly but surely becoming a headache for governments and businesses alike. Italy is on the verge of a referendum that, if rejected, would almost certainly exacerbate the fragile state of the country and especially the banking sector. In addition, the United States has two presidential candidates that share one thing in common: how equally disliked they are by an unusual large segment of the population. Those who think political stock markets are short-lived need only take a look at the British pound or, better yet, the Mexican peso, which is almost acting as a barometer for the U.S. elections. This is just one example of how dependent the emerging markets (EM) still are on developed markets and important to keep in mind in the excitement around the EM’s current stabilization. Be it the oil price, the U.S. dollar’s strength or China’s waning thirst for imports – several factors could bring the EM’s summer fairy tale to an end.

However, for the time being, like most other asset classes, EMs can still rely on the generosity of the central banks. There are still little signs or even much of a chance loose monetary policy will end soon. The U.S. Federal Reserve is increasingly emphasizing that its reluctance to raise interest rates stems more from structural concerns than worries about cyclical headwinds.

All this doesn’t sound like much cause for euphoria. Admittedly, we’ve only mentioned the risks. But we’ve done so because it’s dangerous to underestimate the pitfalls simply because they are no longer making headlines. We remain cautiously optimistic since the situation is not all that bad. In fact, most economies are progressing in a tepid environment. As it turns out, that’s the best course of action for many asset classes. We hope markets stay dull because, even then, it presents a challenge to achieve solid returns.

" Many of the summer’s risks went into hiding spurring a market rebound – but they haven’t disappeared for good. We stay vigilant. "

Stefan Kreuzkamp, Chief Investment Officer

Related Articles

Jul 19, 2018 New CIO View QuarterlyFocus Topic

Making finance sustainable

The march towards sustainable finance looks unstoppable.

Jul 19, 2018 New CIO View QuarterlyMacro Outlook

Fasten your seatbelts

The outlook for the global economy continues to look solid, but risks are growing.

Jul 19, 2018 New CIO Special

Dollar pros and cons

The dollar has already reached our target. Currently, the arguments are balanced.

Jul 19, 2018 New CIO View QuarterlyMulti Asset

The long late cycle

Still, the good economy just about trumps bad politics – and we remain optimistic.

Jul 19, 2018 New CIO View QuarterlyEquity

Cautiously optimistic

For the time being we are focusing more on sectors than countries.

Jul 19, 2018 New CIO View QuarterlyFixed Income

Goodbye Goldilocks

Tail risks are increasing, but selective opportunities remain.

Jul 19, 2018 New CIO View QuarterlyLetter to Investors

Different worlds

The economy is humming. But we are becoming more cautious. Politics are to blame.

Jul 19, 2018 New CIO View QuarterlyForecasts

Our forecasts

All forecasts at a glance

Jul 16, 2018 New Americas CIO View

Americas CIO View

How much Value is to be found abroad?

Jul 13, 2018 New Chart of the week

Chart of the week

China's monetary base looks set to grow faster again soon

Jul 06, 2018 Chart of the week

Chart of the week

On trade, the Trump administration might have some powerful allies.

Jul 03, 2018 Investment Traffic Lights

Investment Traffic Lights

Our tactical and strategic view

Jun 29, 2018 Chart of the week

Chart of the week

Do weak currencies hurt emerging markets?

Jun 22, 2018 Chart of the week

Chart of the week

In the line of fire

Jun 21, 2018 Macro Outlook

Ten years after

The long reach of the financial crisis

Jun 15, 2018 Americas CIO View

Americas CIO View

Inflation: Sometimes it skips a generation

Jun 15, 2018 Chart of the week

Chart of the Week

Looking at real federal funds rates, not a lot has happened after 7 hikes

Jun 08, 2018 Americas CIO View

Americas CIO View

Is it time for U.S. Small Caps to shine? If you pick them right


Please let us know what you think about this article/page.