One of our 10 Themes for 2018 was “Growth gazumps geopolitics” and this is still true. U.S. and, increasingly, European data has shrugged off political concerns and markets have made further gains. But problems remain.


1. More good economic news has helped drive U.S. markets higher, although European markets have lagged.

Continued good news on the U.S. economy (for example on consumption) has encouraged U.S. markets to go higher and higher. They have enjoyed their best summer for many years and have outperformed global equities by a record amount, as we detail on page 2. European markets have been rather less buoyant, for reasons we explain on page 6: in essence, performance between different European markets has become more diverse, due in part to sector or even company-specific factors. But the likely improvement in the European economic backdrop in coming months may help at least to keep European markets towards the top of their recent ranges. And, in China, while some data continues to disappoint, evidence of continued policy intervention on the CNY has managed to stabilize Chinese equity markets for now (page 5).

 

2. This bodes well for market reaction to future policy tightening. U.S. relative outperformance is likely to continue.

Recent market developments do at least suggest that we have now finally abandoned the “good news is bad news” assumption that often drove markets in the years after the start of the financial crisis. Good news on the economy could then be seen as a negative development, as it increased market fears of a scaling-back of central bank market support. That upside-down logic now seems far in the past, which must bode well for market reaction to future policy tightening in the U.S. and elsewhere. As always, the U.S. is in the vanguard here and we expect further U.S. relative outperformance in the closing months of this year, for reasons we discuss on page 2.

 

3. But despite strong growth, don’t be too relaxed about markets. Stay invested, but hedge.

But are markets now being seduced by U.S. economic growth, to the extent that they wilfully ignore problems elsewhere? Strong economic growth should, everything else being equal, make major market reversals less likely. But it is difficult to feel completely relaxed about markets when we seem to still be in the throes of a "traditional" emerging markets debt and currency crises (Turkey and Argentina) and where European political events (Italian budget, Brexit) still constitute major longer-term risks. Further rapid TRY depreciation this week demonstrates, for example, continued fragility that is putting other EM under a cloud. And while we still expect a Chinese economic "soft landing", developments here may not be wholly positive. Further bouts of volatility look likely. So, even in the context of continued U.S. market gains, the message remains: stay invested, but hedge.

 

To download a PDF of the full report, please click here.

 

 
In the EMEA region this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk.
 
CIO Office, Deutsche Bank Wealth Management, Deutsche Bank AG - Email: WM.CIO-Office@db.com