2019 economic forecast: market analysis of three scenarios
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2019 economic forecast: three possible scenarios

An analysis of recent years shows that surprises are never far away on the markets. This is why successful investors work on the basis of probabilities, remain flexible and consider a range of market scenarios. Three well-known scenarios in economic forecasting are the optimistic "bull" scenario, the middling scenario and the pessimistic or "bear" scenario. Three forecasts for the economy in 2019:

2019 market analysis – what we can expect from the economy

Economic forecast no. 1: the optimistic bull scenario

The stock market slump of last December turns out to be just another "flash crash", a sharp but happily short-lived reversal on the financial markets. The expected recession does not materialize, either in the US or in Europe and China. The bullish scenario calls for a rise in equities in the course of the new year as their risk premia look too high. Capital, on the other hand, remains cheap and available. Consumer price inflation and central bank policy interest rates also remain at relatively low levels. At the same time, fiscal policy moves to a more expansionary mode worldwide.

The US boosts government spending on security, infrastructure and education. In Europe too, economic populism, the European elections in May and the deceleration in economic growth also promote a shift towards higher spending and lower taxes. China in turn puts its faith in a systematic stimulus of the economy to protect the country from the impact of trade wars. Measures such as redoubling the commitment to the "Made in China 2025" strategy, the ongoing liberalization of the private sector and stimulating consumer spending by cutting taxes and duties bear fruit. China's economic and market indicators remain remarkably resilient. Other emerging markets also recover from the strong dollar shock in the previous year. The global economy is able to expand again this year with help from fiscal and monetary policy. 

The year brings surprises with double-digit returns on global equities. 

Burkhard Varnholt

Energy prices also recover in this environment. Consumers, businesses, investors and the media regain confidence. The leading economic indicators recover again and the high risk premia and dividends on stocks again attract capital from institutional and private investors looking for higher yields. The year brings surprises with double-digit returns on global equities combined with low single-digit returns in fixed income.

Economic forecast no. 2: the middling scenario

In the middling scenario there are no really drastic events in 2019. Instead of tax cuts, government spending on infrastructure, security and education rises as a political compromise. The US-China trade war ends with a deal and leads to a negative reaction from the stock markets and the industry lobbies. The climate is shaped by the growing rivalry between the US and regional powers increasingly seeking to flex their foreign policy muscles. There are sharp market rotations between sectors, regions and individual stocks. Emerging markets in particular and firms regarded as "national champions" should benefit from this.

Alongside China and Russia, even long-time allies of the US are increasingly attempting to develop greater economic independence. The ability of the US to affect all global dollar payments is regarded by many countries as a latent risk to their sovereignty. China pushes on with the restructuring of its economy and society. Less "made in China," more "invented in China" is the watchword. Sustainability is being pursued as a political necessity. Successful private companies, particularly listed companies, are developing into new national champions.

The year closes with a solid performance for global equities.

Burkhard Varnholt

Demands for greater national sovereignty are also growing in Europe. The UK and the EU strike a Brexit deal on the withdrawal agreement negotiated last year, which is warmly welcomed on all sides. Economically the EU remains the second-biggest economy in the world and retains its resilience. Against this backdrop the fears surrounding Brexit and fiscal deficits ease, Europe's capital flight from south to north slows, yields on 10-year German bunds rise towards 1%, with Confederation yields moving up to 0.5% and the euro/Swiss franc exchange rate reaches the 1.20 level.

On the financial markets the year closes with a solid single-digit performance for global stocks. Regionally, emerging markets perform best, followed by European stocks, where the gap between the earnings yield and bond yield is the highest. The euro, British pound and emerging market currencies are also among the winners, while performance on the bond markets is in the low single digits.

Economic forecast no. 3: the pessimistic bear scenario

In the pessimistic scenario, falling equity prices undermine confidence in the future, leading to weakness in investment, consumption and global trade. Many of the geopolitical conflicts intensify and the trade war escalates. Trade barriers and cyber attacks increase worldwide. This saps international investment, weakens economic growth and leads to falling commodity prices. Credit risk premia rise in the capital-intensive energy sector in particular. A tightening in the availability of capital creates problems for companies with more limited financing options. Because the high-yield bond market is illiquid, institutional investors primarily reduce their liquid passive equity investments.

Politically the EU experiences a chaotic Brexit, combined with fresh elections and general uncertainty about Europe's future. A mood of popular dissatisfaction and the politically weakened governments in Germany and France prompt the euro to slump towards parity with the Swiss franc. This forces the Swiss National Bank to further expand the size of its balance sheet and intervene on the foreign exchange market. The US remains caught up in bitter partisan political battles. Changes of personnel among top-level administration officials leads to additional instability. Along with the growing US budget deficit, these factors push down the US dollar. 

Long-dated government bonds and the Swiss franc are among the winners. 

Burkhard Varnholt

Given the slowdown in the global economy, monetary policy is eased globally, with each country attempting to engineer a weaker currency. Alongside the Swiss franc, the Asian currencies strengthen above all thanks to their relatively strong fundamentals and declining political tensions. The year closes with lower equity markets, although this is softened by a sharp recovery in the markets towards the year-end. Long-dated government bonds, led by Swiss Confederation bonds, and the Swiss franc are among the winners.