Outlook for the global financial markets in the second half of 2012
Euro crisis, growth engines without steam and politically driven markets to dominate the second half of the yearThe ongoing euro crisis is casting an increasingly long shadow over the global economy, including the growth markets which have been driving expansion so far. This situation is now also having a more marked effect on the Swiss economy, particularly since upward pressure on the Swiss franc can be expected to persist, despite the exchange rate floor set by the SNB. In the light of ever more extreme investment scenarios, Julius Baer’s analysts recommend that investors focus on short-term trading strategies, maintain a low profile or invest solely in quality.
No recession in Switzerland, but economic downturn unavoidable
The fixing of a minimum Swiss franc / euro exchange rate substantially eased the tensions in the Swiss export sector, bringing welcome and urgently needed relief to the industries concerned. Partly thanks to strong investment activity, capacity utilisation remained at high levels. In the long run, however, Switzerland cannot defy the forces of a continuously worsening global economy: “The deteriorating situation in the euro zone, the mediocre growth in the US, but also the relatively modest outlook for several emerging markets such as China, India or Brazil, which are important for Switzerland’s export industry, represent a burden for the growth outlook,” explains Janwillem Acket, Chief Economist of Julius Baer. “At the same time, the Swiss franc remains a safe haven in uncertain times and will continue to be sought after. While this reputation has a positive impact on domestic market sentiment as well as on employment and consumption, it does little to sharpen the competitive edge of the Swiss export sector,” Acket continues.
The euro zone – weakest link in the world economy and the main potential source of jeopardy for global economic activity
In the second quarter of 2012, large swathes of the euro zone’s southern periphery have decoupled completely from the world economy and slipped into a deep recession, adding a new dimension to the institutional crisis in Brussels and the crisis of confidence in the euro: Banks overloaded with non-performing loans are engaged in a vain search for backing from endangered, highly-indebted national governments, while simultaneously hoping for instant support from the rescue fund or from the ECB directly. It will be thanks only to the latter, in the view of Julius Baer’s analysts, that the capital markets will avert a Lehman-style collapse, even if Greece were to leave the euro after the fresh elections on 17 June 2012. The unlimited funding the ECB is providing will take care of that. Nevertheless, this neither reduces the billions which banks will have to write off nor does it accelerate the anaemic pace of bank lending throughout the entire euro zone. This situation will also leave its marks on Germany, the euro zone’s strongest economy to date, dampening the pace of growth there. While this new climax in the euro crisis is increasing the pressure on Europe to implement rigorous and far-reaching measures, such developments will also create new opportunities: “Should Europe’s politicians manage to take concerted action to tackle both sovereign debt and the banks’ indebtedness in one go, thus providing the financial markets with convincing, viable, and growth-focused solutions, we see good prospects for a positive growth dynamic gaining traction in the euro zone as well,” says Acket.
Emerging markets focus on domestic growth – global economy remains on a tightrope walk
With the global economy expected to grow by 3.3% in 2012 and even 4.0% in 2013, the Baer analysts are optimistic about the future – despite the darkening economic outlook for Europe. However, these figures disguise the below-average growth rates projected for the global economy’s former growth locomotives, China, India or Brazil, where lower demand from developed markets has also left its mark. Responding to the new paradigm, these countries have started to concentrate more on stimulating their domestic economies – at the expense of price and exchange rate stability. As a result, the world economy continues to seek a fine balance between two extremes: moving away from previous quantitative easing and support of the financial sector on the one hand and avoiding a slump in economic activity and a concomitant increase in inflation on the other hand.
Political markets require increased flexibility
Over the last few years, investors have had to get used to incorporating ever more extreme market assessment scenarios into their analysis. The latest distortions in Europe’s government bond markets suggest that some market participants are clearly preparing for a euro zone break-up which will bring a period of global deflation in its wake. However, the recent past has also proven that rapid trend reversals can also occur in the current market environment. The last few months, in particular, have shown that economic policy decisions can have a fast and fundamental impact on financial markets, both positive and negative.
In the short term, there will always be good opportunities for entries and exits. Investors should either tackle the see-saw of the markets actively or stay on the sidelines: “Longer-term investors should remain vigilant, keeping liquidity ready for times when political decisions and the global growth outlook will again provide positive surprises,” says Christian Gattiker, Chief Strategist and Head of Research at Julius Baer. Remaining patient and watching the current politics-induced risk situation from the sidelines should pay off in the months ahead. For all those who prefer to stay fully invested, quality should remain the sole criterion. That can be found in globally focused, well-positioned and financially strong companies (either through equities or corporate bonds) and in emerging market government bonds. Given the persistently low yield levels, attractive investment opportunities can also be identified in high-yield corporate bonds, some of which more than compensate investors for the risks involved. This is however an area in which correct selection and broad diversification of single investments remains crucial.
Janwillem C. Acket
Tel. +41 58 888 8100
Chief Strategist & Head of Research
Tel. +41 58 886 2658
Tel. +41 58 888 8888