DWS hints at cautious optimism for investing in 2012
DWS Investment has given a reason for mild optimism in its outlook for 2012, by noting US leading indicators are improving again, while useful replacements have emerged for those managers seeking to trim exposure to ‘safe haven’ debt.
Deutsche Bank’s retail asset management unit also says corporate bonds are “attractively valued”, while US and EM equities offer prospects for growth.
The Frankfurt-headquartered manager adds we should expect “growth weakness, but no global recession”, and little pressure of inflation in the developed world next year.
The US dollar will find support in the short-term, while EM currencies are in demand over the longer term.
In equity strategies, DWS advocates US as a haven of stability, and German quality names and dividend-based strategies as attractive.
However, the asset manager’s prognosis for investing next year comes with many caveats.
Asoka Woehrmann (pictured), CIO, says the eurozone’s debt crisis dominates markets, as contagion spreads to Spain, Italy and Portugal, and “more countries are in danger”.
The problem has “disturbed the transmission mechanism of monetary policy”, and “impacts the real economy” with savings programs restricting growth, lending become more restrictive, and consumer and business sentiment deteriorating, he says.
Woehrmann says the ‘downward spiral’ can be stopped via the ECB becoming an active buyer of debt, and by greater fiscal union.
DWS says this latter change is a “reasonable, permanent solution”. An increasing number of eurozone leaders, including German chancellor Angela Merkel, appear to be heading towards this goal this week.
Stefan Kreuzkamp, head of DWS fixed income Europe, says eurozone debt has lost its ‘risk-free’ status, and the debt crisis has “ballooned into a crisis of confidence”.
Allocation decisions, primarily to the safety net of Bunds, are currently dominated by the currency bloc’s crisis. He points to Bund yields of about 2% as a result, being markedly lower than those of Germany’s neighbours.
Kreuzkamp points to the “relative attractiveness of AAA-rated countries such as Australia, New Zealand and selected EM markets such as Poland, and Mexico.
“Investments on higher yield government bonds will increase as soon as Bunds and US Treasuries lose their ‘safe haven’ status,” he says.
On the FX front he says the eurozone’s drama is “positive for US Dollar in the short term”, with duration and FX management being key return drivers in his universe next year.
Among corporate bonds, where risk spreads of credits are “attractive” as downside risk is priced in by markets, Kreuzkamp favours “defensive blue chips such as telecoms, utilities, and consumer goods”.
Tim Albrecht, senior fund manager for equities, says changing the activities of the ECB, to help calm markets, would “drive equities short-term [but is] not a sustainable solution”.
For long-term stability, fiscal union is needed, which Albrecht notes will have a “laborious implementation process”.
Presently, though, he says corporate valuations for European equities are low, as lower profits are priced in. Europe is on a discount versus the US, despite “solid balance sheets” and safe havens of Germany and Scandinavia.
Things seem significantly better in the US, according to Albrecht’s analysis.
“Leading indicators [have been] improving again recently, expansive monetary policy supports equity markets, employment data shows gradual improvement; and there is no drop in private consumer spending.”
He does, however, point to continued high government debt and structural problems that “remain unsolved”.
Albrecht reserves arguably his most optimistic outlook for emerging markets, where “growth perspectives continue to be positive, inflation has already peaked, there is population and consumption growth; and valuations seem historically low”.
But he cautions investors should monitor risk among EM companies of dependency on Europe and North America, some countries see growth cooling off, inflationary tendencies still remain and there is general risk aversion from investors”.
Overall, Albrecht highlights “quality stocks” as his first choice, and dividend strategies for “stable returns in volatile markets” as they are “tried and tested strategies” for low growth environments. He adds companies generally have strong balance sheets to pay dividends.
Another favourite is German quality stocks. “Public budgets relatively solid; there are high competitiveness and innovations; robust employment market, and consumption; demand from emerging markets favoring exporters; and attractive valuations” with the Dax at around 5,000 points.