Economic Outlook

Our baseline scenario

Market Economy 4.0 US Europe Asia Latam
Baseline scenario Never before has the economic outcome been so binary, confronting investors with two possible extreme outcomes. Scenario one consists of a complete meltdown of the present economic system, with major wealth destruction and a complete reorganization of the world order. The second scenario consists of a “muddle-through monetary policy,” with all kinds of experimental undertakings such as trade wars, political pressure for higher minimum wages, forced wealth-distribution through tax reforms, and a sharing economy, amongst other endeavors. Given this context, earnings expansions will be possible because operational efficiencies will improve (better use of robotics and automation); Therefore, GDP growth will outnumber wage growth, resulting in no inflation; interest rates will remain low; and some states will experiment with GDP/debt ratios well above historic levels. Finally, the political order will enter into a transition period with Generations X and Y at the helm. Our baseline scenario assumes that the second outcome will predominately apply, and for a prolonged period of time, probably beyond 2025. We expect that as of 2025 and onwards, the world will enter into a new growth cycle based on true innovation and wealth generation. Ever since the FT in 2007/2008, expansive central bank policy and low interest rates have supported the market. Unemployment rates have continuously decreased, and the US has reached full employment. The rate of inflation and global growth are expected to stay low for a prolonged period of time, given the disruption in industrial activities, i.e. ever-increasing use of artificial intelligence and robotics, shrinking middle-class, and aging population that has different consumption behavior. The official QE has expired in September of 2018. However, we believe that some kind of QE will always exist, with the aim of temporarily flattening out—directly or indirectly—funding costs for companies, supporting earnings, and valuations, etc. With the central bank’s policy changes, the so-called “bond proxy trades” could expire, while financials could grab back some of their lost splendor. Emerging markets have underperformed DM in the past decade and are presently undervalued by around 30 % versus developed markets. This performance gap is expected to become smaller over the next 12 to 18 months. Ever since 2017, EM have lost trade war. By markets, we continue to like Taiwan and Korea (Technology) and Australia (Commodities and Materials). In an environment of accommodative global liquidity conditions, rising consumer confidence and lower unemployment rates in DM, the favorable outlook for Latam continues. This translates into higher commodity prices, which will help most EM countries to balance their budgets. Additional support for market may come from calmer political fronts. Brazil is finding a way out of the chaos, while broader events like NAFTA negotiations may temporarily add drag.
What drives our opinion The digital transformation is far-reaching and will reshuffle the existing economic set-up. The technical revolution is best described as a combination of multiple factors, including aging demographics, fast and cheap transfer of products and services, and an ever-shorter product life cycle. If the factors above are correct, only companies with a forward-looking view will be equipped to capitalize on the trend. As the adage goes: “The winner takes all.” The current economic cycle is maturing, lead by the US. Currently, late-cycle companies should benefit most from the present conditions of capex recovery. This occurs in sectors of Oil & Gas, Power transmission & distribution, electrification of cars, digitization, and agricultural and mining equipment. We are less favorable on early cyclical where sales growth is expected to stagnate in the quarters ahead. Europe is lagging behind the economic recovery of the US by about 18 months. Pockets of concern still exist all across Europe. However, we believe that economic fundamentals, ever-shrinking unemployment rates in all EU countries [now Europe is close to full employment too (ex structural unemployment, excellent  consumer satisfaction, and attractive market valuations, offer highly fertile investment case. Our key attention goes to Germany and Switzerland. On average, companies within these countries add the most value (worldwide measures) to their products and services, and therefore offer the best risk/reward opportunities. In Asia we favor regions that have exposure to lasting secular growth trends in DM such as IIOT and materials. On the back of a potential renegotiation of some trade agreements between the US and some EM countries, very short-term catalysts are lacking. With still-persuasive consumer sentiment in DM, EM are expected to benefit above average as they source and entertain continuity in DM. Global growth in EM is expected to be around 4%, and with some important valuation lag, EM offer some of the better risk/reward trade-offs. No active exposure undertaken!
Our favorite stocks*

*this is not an exhaustive list

Visa Inc.
Nvidia Corp.
Square
Salesforce
Qorvo Inc.
Schlumberger
Qorvo Inc.
Halliburton
Bank of America
Amazon
ABB
Nestlé SA
Atlas Copco
ASML
Royal Dutch
n/a n/a
Investment opportunity covering this theme IRISOS Digital Age Transformation ISIN: CH33226567 Tracker LowVol S&P 500 ISIN: XS1410025032 n/a Credit Equity Note; Credit Bombardier, Equity: Long Asian Equities ISIN: XS1677440361 n/a
Level of Risk
Opportunity
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DISRUPTION AS OPPORTUNITY