September 24, 2018

DWS (previously Deutsche Asset Management) is sticking to its global growth forecast of 3.9% for both 2018 and 2019, while China is forecasted at 6.5% for 2018 and 6.3% in 2019; sentiment in China is on the negative side, but fundamentals continue to improve which means valuation gap is becoming more attractive; the current trade conflict will not lead to RMB devaluation and Trump is likely to announce a further round of measures to reach the “500 mark”; path of Fed rates normalisation continues with two more hikes by end of 2018; higher oil price is expected, while inflation is picking up but not out of order as it is becoming structural.

Sean Taylor, Chief Investment Officer, Asia Pacific, DWS, shared the following insights on his market outlook for the remaining of 2018 and what to expect as we move into 2019:

Global Trade

● We consider now that it is a trade conflict, and not a trade war, because a conflict would end sooner than a war

● Given Trump’s speech on September 18 with the Polish leader, we anticipate that the US will likely go to the “500 mark”, and announcement would come sooner rather than later given the upcoming mid-term election in the US

● Fundamentally, the US economy is still strong and the US equities market is still quite resilient; if one needs to worry, they should start to think ahead in a couple of years’ time, how to prevent hard landing of the US economy by 2020-2021

● And in terms of China, the longer-term impact of the current trade conflict is that ultimately, China will accelerate its domestic demand and its One Belt, One Road progress, and also try to seek improving relationships with the rest of Asia; with that, we expect intra-regional trade to increase and ASEAN to benefit from more trade within the region and with China

● And taking a global long-term five-year view, it is more likely that US-based companies will need the China market more than China-based companies needing the US market

● The biggest short-term risk overall to global market is uncertainty, companies and investors have chosen a “wait and see” mode

Monetary policy

● Fed’s normalisation will continue; expect two more hikes within this year – one next week and the other one probably in December; and by end of Q2 2019, rate hikes expected by 25bps

● Fed seen reaching “neutral rate” of 3% in 2019

● And ECB will finish QE by end of this year

● In some countries monetary tightening has already happened – as seen in Indonesia, Malaysia, Philippines and Russia


● We expect the USD to remain strong, but this move has currently run out of steam and new impulses are required to drive it higher

● And EUR/USD will remain at our strategic target of 1.15s

● In terms of RMB forecast, we now have RMB to reach 7 by September 2019; and are taking a more tactical view towards RMB

● Having said that, we believe that the RMB will not be devaluated because of trade, for the following three key reasons:

– China is still trying to go through long-term reform and thus needs a stable currency

– China has huge over-capacity to be sold by One Belt, One Road and hence needs a stable currency too

– China does not want speculation against RMB


● Overall, we are still positive on equities, although returns will come with heightened volatility

● 2018 is the eighth year that the US equities market has gone up, but moving into 2019, we are coming to a point where the focus will be trying to identify international investment opportunities outside of the US

● On a global basis, we are neutral across all sectors, but have trimmed down technology earlier because it is becoming too expensive

● Looking ahead into 2019, we are forecasting just under double-digital return for the US equities market, as well as the Euro-zone markets and Germany; probably a few more percentage points for Emerging Markets


● We are quite firm to believe that China is not going through a property bubble, in fact there are high-quality property credits existing in China now

● We continue to overweight Chinese equities. Key strategy is stock selection amongst the right sectors, and to be tactical

● We still like the new economy, healthcare, education, tourism and lifestyle sectors, and there is now a clear divide between the “Young China” and “Old China”; meanwhile, we believe these sectors have the best long-term potentials although in the short term, some of them could be impacted by regulation; regulation helps them to become better companies

● Overall, sentiment is on the negative side, but fundamentals are not bad

● Therefore, going forward for the China equities market, it is really a battle between momentum and valuation: momentum clearly is not good, but the valuation gap is getting more attractive

● It is clear that earnings have come down, but we could still see a 15% earnings growth this year, and expect another 15-16% earnings growth next year, these figures are actually quite impressive and cannot be found in other markets