At the start of the summer, we expected a gradual slowdown in global growth that would last into 2022. Instead, the picture emerging is of a global economy which, led by the US and China, has lost momentum much more quickly and earlier than we expected.
Our assessment is therefore that the global growth slowdown is now over, and we expect stable to slightly accelerating growth going forward to year-end.
• In China, we estimate growth rebounded back to positive levels in September, as Corona restrictions imposed in August have already been removed.
• In the US, we expect stable to perhaps even slightly increasing growth in the short term, as corona infection rates retreat again after the summer peak and supply chain challenges slowly ease.
• In Europe, unlike the US, the economy still has a little catching up to do before reaching pre-corona levels of economic activity and Euro Area fiscal policy will continue to have a positive impact on growth. Thus, while the best is definitely behind us in terms of the speed of improvement in economic activity, we expect Euro Area growth of 3-4 per cent annualised going forward to summer 2022. That is around twice as high as the economy’s long-term potential.
Bo Bejstrup Christensen
Chief Portfolio Manager, Head of Macro & TAA, Danske Bank Asset Management.
Read the whole Asset Management Quarterly View report here.
EQUITIES: Still greatest potential in Europe
Turning to financial markets, European equities have the brightest outlook in our opinion. We estimate the continental European equity market – in contrast to the US and emerging markets – is still priced on the cheap side. Hence, given our favourable growth expectations, we expect a return of 5-10 per cent in the coming year.
Emerging market equities have clearly been the poorest performers this year. In our view, this was partly due to tight economic policy in China and the subsequent and significant growth slowdown. We still assess emerging market equities to be too expensive and we expect a modestly positive return of around 5 per cent in the coming 12 months, which is a slight improvement on our expectations at the start of Q3 2021.
We still assess US equity market valuations to be unduly high – by around 5-10 per cent. However, we have not changed our view that solid growth and an accommodative monetary policy can support these relatively expensive valuations. Moreover, our growth expectations now point to stable to perhaps modestly better growth in the short term. We therefore expect a return of 0-5 per cent from US equities in the coming 12 months.
BONDS: Expect better returns in Europe
Looking at the bond market, the decline in European yields during the summer came faster than we expected. Yields in the mid-maturity section of the German curve had already reached the level we expected sometime in 2022 by mid-August this year. Yields have increased again since then, and we are again looking for stable-to-slightly-declining yields in Europe in the coming months as inflation eases and the ECB continues its dovish rhetoric. We therefore have modestly positive return expectations for German Bunds and government bonds from other core European countries of 2-5 per cent for maturities of 10 years and more. Shorter yields should remain relatively unchanged.
US yields also fell towards the middle of the third quarter by more than we expected three months ago, though they have since risen again. In our view, however, the most pronounced downward pressure on US yields – from the growth slowdown – is now behind us. Moreover, the Fed has clearly changed its tune and will now target normalising monetary policy. We therefore expect returns of around 0 per cent for maturities up to 10 years, while the very long end may come under a little pressure.
This material has been prepared for information purposes only and does not constitute investment advice. Note that historical return and forecasts on future developments are not a reliable indicator of future return, which may be negative. Always consult with professional advisors on legal, tax, financial and other matters that may be relevant to assessing the suitability and appropriateness of an investment.