Investment outlook: Mind the gaps in the turtle cycle

Regional differences in growth and policy will drive international financial markets next year. This is the view of Asoka Wöhrmann, Chief Investment Officer (CIO) of Deutsche Asset & Wealth Management in his outlook for 2015. Markets will continue to be dominated by central banks’ monetary stances. The more accommodative policies in the Eurozone and Japan are likely to become even more expansive next year. Meanwhile, the US Federal Reserve and the Bank of England should start to exit this kind of policy. This growing divergence of policies ? and economic cycles ? creates investment opportunities. It also means investors will need to pick their spots carefully. “Against a backdrop of regionalization and divergence, investors will need to make smart choices next year," said Wöhrmann.

“Recovery is sluggish, a phenomenon that we describe as the Turtle Cycle. Everything is progressing more slowly than usual. But in the current low interest rate phase, one thing is clear: you will need to take disciplined risks if you want to grow your wealth. In 2015, equity markets will remain the place to be invested," said Wöhrmann. However, he cautioned that markets will remain susceptible to geopolitical crises.

Economic upturn more visible

The global economic recovery will become more evident in 2015. However, the upturn will be slow overall and will vary by region. The US is expected to be the engine of global growth, with its gross domestic product forecast to expand by 3.2 per cent. Deutsche AWM’s growth forecast for the Eurozone is 1.2 per cent. But Wöhrmann added that the Eurozone is not facing deflation. “Europe is not the new Japan," he said.

The US dollar is likely to rise strongly next year, especially against the Euro. In the medium term, the Euro : US dollar exchange rate could fall to around 1.17 : 1. This is the same level it was at in 1999, when the single European currency was introduced and when the continent’s economy was significantly stronger than it is today. Parity (i.e. 1 : 1) cannot be ruled out. Wöhrmann said: “The Greenback is making a comeback. It will benefit from the US’s leadership in terms of growth and expected returns." Some emerging market currencies may also offer interesting investment opportunities next year, though selectivity will be key. In addition to the Euro, Wöhrmann is skeptical about the prospects for the Japanese Yen.

In international bond markets, a gradual normalization of returns is expected, says Stefan Kreuzkamp, CIO EMEA and Head of Fixed Income EMEA. Kreuzkamp does not anticipate a sell-off. He believes sovereign bonds issued by the US, Germany, UK and Japan offer limited return potential. He sees greater potential in bonds from the Eurozone periphery, especially Italy and Spain. Select maturities may offer particularly appealing return-risk ratios. In his view, corporate bonds are an asset class to watch. Kreuzkamp said: “The recipe for success in bond markets in 2015 will be to exploit regional risk premiums and currency opportunities."

European equities favored

Commenting on international equity markets, Henning Gebhardt, Global Head of Equity at Deutsche AWM, said: “2015 will be a fairly typical year, with percentage gains in the high single digits." This would be in line with the long-term average.

The equity decade is in full swing, Gebhardt added. The equity upturn should continue for a seventh year, in keeping with the long-lasting turtle cycle. The main driver of equity prices will be dividends, with support from moderate growth in profits. Gebhardt favors European equities, especially German stocks, which are at attractive levels historically relative to US equities. That said, the US offers some potential for European investors in particular, due to its economic strength and the expected rise of the US dollar.

Addressing speculation about a possible real estate bubble in Germany, CIO Wöhrmann said that German real estate is still relatively moderately valued on an international comparison. Although the residential real estate market has shot up in some cities, overall there is no property bubble in Germany, he said. From an investment point of view, Wöhrmann believes the commercial real estate market looks interesting.