Global Strategy Q1 2020

Political uncertainty appears to be subsiding somewhat and a moderate economic recovery should take hold in 2020. Central banks will maintain the course they have adopted and keep an easy monetary policy in place. In this environment we prefer risk assets to safe haven assets. Growth in corporate earnings should underpin further stock market gains. In the corporate bond market we continue to recommend IG hybrid bonds as well as BB-rated HY bonds.

Economy: While a sustainable resolution of the US-China trade dispute does not appear to be within imminent reach, we expect at least no renewed escalation. The US economy should post a solid performance in the coming year, primarily driven by consumer spending. While the labor market is in strong shape, there are nevertheless no indications of a build-up of inflation risks. The inflation rate should fluctuate between 1.5% and 2.0%. The unfavorable global environment weighed on export growth in the euro zone and pushed GDP growth in 2019 markedly below the level of 2018. We expect the pace of economic growth to improve slightly in 2020 and are forecasting GDP growth of 1.2%. While the exit of Great Britain from the EU is now actually materializing, growth could be dampened by political upheaval in Italy and/or Spain. Core inflation should slightly increase, but not to an extent sufficient to push headline inflation close to the ECB's target in the foreseeable future.

Bonds: Both the Fed and the ECB will maintain their policy bias in 2020 and implement loose monetary policy. In the US we are forecasting an unchanged federal funds rate and a slight rise in yields across the entire yield curve. However, a renewed emergence of political risks (e.g. a further escalation of the trade war) could unsettle the markets and put downward pressure on yields. The ECB will leave short term interest rates unchanged. A moderate improvement in economic data should weigh on the bond market, while the ECB's asset purchase program should concurrently provide support. All in all this is likely to result in just a slight increase in yields. In the corporate bond market we continue to recommend IG hybrid bonds and bonds of the rating category BB, the highest credit quality level within the HY segment.

Currencies: Provided political problems do not escalate, the euro should benefit from an improving economic outlook in 2020. Thus we expect a moderate appreciation of the euro against both the US dollar and the Swiss franc. We are forecasting a sideways move for gold in a trading range from USD 1,450 to USD 1,500.

Stocks: Diminishing political risks and improving growth prospects are leading to a slight increase in investors' risk appetites. The prospects for corporate earnings growth in 2020 are strong and the valuation of stocks continues to be attractive in comparison to government bonds. We expect the global stock indexes to post gains ranging from 0% to +5% in the first quarter. Among sectors we specifically favor the technology, health care, industrial, retail trade and consumer goods sectors.

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