The current economic climate will cripple equities and commodities, while gold will prevail in the short term, according to Dirk Wiedmann, head of investments at Rothschild Private Banking & Trust.

Amid a storm of speculation surrounding the eurozone sovereign debt crisis, Rothschild has boldly stated that it fully expects a Greek default, even though it may not be imminent. While European policymakers will strive to avoid an economic catastrophe, they are simply delaying the inevitable, says Wiedmann.

“Greece’s debt burden is ballooning towards 150 per cent of GDP and the budget deficit remains stubbornly high. The dynamics of the Greek economy mean that both strong growth and sustained budget surpluses are highly unlikely…The Greek banking system faces bankruptcy, and the European Central Bank will suffer heavy losses. Ireland and Portugal and possibly also Spain, Italy and Belgium may be caught up in the fallout,” says Rothschild’s head of investments.

For this reason in particular, Rothschild’s latest asset allocation report advocates an overall defensive position, with announcements of reduced exposure to commodities and increased holdings of AAA-rated government bonds in what it believes are “safe haven” currencies, from countries including Sweden, Norway and Switzerland.

The firm is of the view that commodity prices will suffer from a slowdown in global manufacturing, as well as the desperate economic outlook. Furthermore, Rothschild remains sceptical on the short term performance of equities as it believes growing wages, taxes and input costs will eat into profits.

On the other hand, sustained debt problems in the eurozone and the US, along with weak paper currencies in both of these regions, serve to support the case for buying gold as a hedge against poor performance across other markets, says the report. Rothschild also has a positive outlook on real estate, speculating that the sector will benefit from prolonged low interest rates and fears over a continued upward trend in inflation.

While Rothschild has highlighted economic turmoil as the main reason behind its current defensive investment position, the firm believes the long term economic outlook is rather different. The private bank forecasts global economic recovery, albeit at an incremental rate. The recent fall in oil price will be a significant boost to global growth, says Rothschild.

The report acknowledges there are a number of threats to the global recovery. “In the US, job creation remains slow, house prices are falling and government cuts are now starting to be felt. The ISM services index dropped sharply in May, following news of sluggish growth in the first three months of the year. The Japanese economy, hit hard by the earthquake and tsunami, has plunged back into recession: GDP shrank at an annualised rate of 3.7 per cent in the first quarter, and the second quarter looks likely to be just as bad,” it says.

However, Rothschild believes the most likely long-term scenario is slow global growth, supported by emerging market performance. The firm believes inflation will grow slower than expected, predicting lower oil prices will reduce inflationary pressure, which will allow interest rates across the developed world to remain low. This in turn will result in yield curves remaining steep, thus supporting growth. While consumers in developed economies will be hindered by higher taxes, demand will still be fuelled by developing countries, again supporting growth, according to Rothschild.