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Banca March - Crecemos con valores, crecemos juntosNews

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Banca March recommends investing in alternative assets as central banks prolong expansionary cycle

  • Banca March has highlighted the need to modify investment styles, increasing the weight of alternative assets that allow investors to harness the illiquidity premium offered by the markets, given the outlook for more moderate economic growth than over the last decade.
  • The bank's Market Strategy team expects the slowdown to continue into the months ahead, though it will not spark a global recession. Banca March expects global economic growth to slow to 2.9% in 2019, picking up again towards the middle of 2020. Private consumption and the services sector should partially offset the contraction of the industrial sector.
  • Trade tensions, a potentially erroneous application of monetary policy and the possibility - albeit less likely - of a no-deal Brexit continue to be the main macroeconomic risks.
  • Following the shift in recent months, during which central banks have once again become net liquidity contributors, Banca March now expects to see limited monetary measures and believes the market is pricing in excessively aggressive official rate cuts.
  • Banca March's forecast for Spanish GDP growth is 2.2% for 2019 and 1.9% for 2020, meaning Spain will outperform the broader Eurozone, where the bank expects GDP growth of 1.1% and 1.2% for the same periods.
  • Equities are generating modest returns but continue to offer greater potential than fixed income, with the technology sector and certain defensive names in the healthcare and energy sectors expected to outperform.
  • In fixed income, the bank likes emerging markets in hard currencies.

At a presentation of the bank's market outlook for the months ahead, Joan Bonet, Director of Market Strategy, said that Banca March expects the global economic slowdown to continue throughout the rest of 2019.

In light of the bank’s forecasts for more moderate economic growth than last decade, the experts at Banca March have highlighted the need to invest differently, increasing the weight of alternative assets and investments in private equity projects, which allow investors to harness the illiquidity premium offered by the markets.

The combination of an economic slowdown and lower inflation has given rise to limited returns across the board, especially in euro-denominated fixed income. In this asset class, Banca March continues to prefer hard currency-denominated emerging market debt.

The Market Strategy team points out that although equity markets are accurately valued, current interest rate levels make them more attractive than fixed income. Banca March's experts also emphasise the significance of dividend yield versus bond yields. However, they warn that corporate earnings will need to recover before we see equity prices rise. “We believe that the forecasts for 2020 corporate earnings growth will continue to be downgraded, so our outlook is around 5%, versus a market consensus of 10%. We therefore advise caution in the short term,” said Bonet.

By sectors, the bank recommends continuing to invest in technology, as well as in defensive stocks, such as European companies specialising in healthcare or global energy names, which are trading at more reasonable prices than sectors like consumer staples or electricity, for example.

In terms of regions, the bank has identified compelling opportunities in emerging markets, especially in Asia, where they believe the degree of penalisation by the market has been excessive.

Less favourable growth outlook

Given the current trade tensions between the US and China, the uncertainty around how Brexit will eventually unfold and the return to more expansionary monetary policy by central banks, Banca March analysts are forecasting global economic growth of 2.9%, versus the 3.6% registered in 2018. However, despite growth rates falling to a ten-year low and signs that the industrial sector is contracting, the bank expects the global economy to grow at a rate of 3.2% in the second half of 2020, mainly driven by private consumption and the services sector.

The intensification of protectionist measures also points to a less favourable landscape. Whilst Banca March's baseline scenario is still that the US and China will strike a deal, which would reduce the risk of a global recession, the timing of such a deal will determine the degree to which international trade deteriorates; it is currently growing at the slowest pace for a decade. Bearing in mind that 2020 is an election year for the world's biggest superpower, Banca March's team of analysts expects the two countries to reach an understanding before then, as re-election in the US is typically linked to a robust economic performance.

In Europe, Germany, one of the markets that has been hit hardest by the trade tensions, will enter a technical recession, a fate that the US economy may be able to avoid. The UK's departure from the European Union also continues to dominate the political agenda, given the looming Brexit date and the climate of intense confrontation. The likelihood of a hard Brexit has grown in recent months, since Boris Johnson took the helm. Currently, the most likely outcome is an early general election and an extension to the departure date, according to Bonet. The forecasts by the Banca March Market Strategy team in the event of a no-deal Brexit anticipate a contraction of British GDP by 1.2% in 2020 and almost 2% in 2021.

As for eurozone GDP, the bank forecasts growth of 1.1% in 2019 and 1.2% in 2020. In the case of Spain, Banca March has also observed a gradual slowdown, but believes the domestic economy could maintain a higher growth rate than the rest of the eurozone, underpinned by the strength of domestic demand. The bank's outlook for domestic GDP growth stands at 2.2% for 2019 and 1.9% for 2020.

The main risks to the Spanish economy identified by the team include weaker external demand and the lack of structural reforms against a backdrop of political uncertainty.

Monetary policy

Following a brief period in which central banks sought to normalise monetary policy, the economic downturn has led them to inject further liquidity into the system, positioning them as net asset purchasers again. “However, the impact on the economy will not be immediate, as it tends to take 12 to 18 months to react to monetary stimulus measures,” Bonet explains. Bonet also warns that the support provided by central banks will be less aggressive than the markets expect. “The market is pricing in aggressive interest rate cuts; these are not in line with our outlook for the economic slowdown, which suggests that a global recession is unlikely,” he explains.

Banca March believes inflation will remain structurally low, but does not expect to see deflation given the strength of the labour market. In the US, the bank expects to see prices rise by 1.7% in 2019 and by up to 2% in 2020, which is substantially higher than the 1.3% inflation rate forecast for both years in the eurozone. The inflation forecast for Spain is slightly lower, at 1% for this year and 1.3% for 2020.


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