Some thought the ‘sweet spot’ of the global economic recovery wouldn’t last till the end of the year.
But not Deutsche Bank.
In a note out on Friday, the bank’s fixed income team says that sweet spot could persist for another six or nine months:
We expect global growth to remain strong until at least the middle of 2010 due to a turn in the inventory cycle, easing credit conditions, further fiscal stimulus and sustained low interest rates. We believe the market is underestimating the quantitative impact of these factors and the length of time (6 – 9 months) it will take for them to work their way through the global economy. For instance, we believe US growth could be twice as high over the coming three quarters (4%) as the consensus forecast (2.3%).
This global “sweet spot” is historically very rare — improving economic data in the context of still extremely accommodative fiscal and monetary policies and abundant market liquidity—and provides the perfect mix for a range of risky assets.
The idea here is that the turning of the inventory cycle (a slowdown in destocking), combined with with the DB’s expected pick-up in lending, together with continued ample (central bank-provided) liquidity and expansionary fiscal policy — will come together to create a virtual golden period for traditionally risky assets.
Here’s what they say investors should be looking for:
So how to benefit from this benign environment over the next 6 months? We believe asset classes likely to outperform in this environment should combine the following features:
- Cheap valuations relative to fundamentals;
- Positive correlation to the momentum in growth and a return of risk appetite;
- Limited downside risks from a rise in inflation expectations;
- Benefit from the abundant liquidity;
Specifically, DB says, that translates into emerging market stuff, high-yield spreads in credit, and gold.And here’s their conclusion.
We expect the rally in risky assets over the last 6 months to continue for another 6-9 months. Our view is predicated on a sharper than expected rebound in the real economy, supported by accommodative central banks and a shift back of liquidity into various asset classes. In some cases, our views are supported by compelling valuation arguments (e.g. short rates, long high yield, and long EMFX). In other cases, the dynamic associated with a sharp improvement in economic momentum should push assets to overshoot their fair value levels (e.g. equities and EUR/USD).Not-so-sweet for the bears then.
Related links:
A safe day for the bears… – FT Alphaville