Investment Strategies

Deutsche Predicts Shrinking Eurozone-US Growth Gap, Smiles On Select Equities

Tom Burroughes Group Editor 29 June 2021


The banking group is one of a cluster of large lenders that are issuing half-year growth, investment and asset allocation forecasts.

The era of muted inflation pressures is over. The growth gap between the US and the eurozone is likely to narrow over the coming year, while equities overall remain attractive although US stocks look expensive, Deutsche Bank said in a note. 

Casting its eye over a variety of economies, Christian Nolting, global chief investment officer, and Tuan Huynh, chief investment officer, Europe and Asia, said they are positive emerging market (EM) equities, particularly in North Asia. They also like European small-cap stocks because they are sensitive to improved economic activity. The bank has also cut its gross domestic product forecast for India to 10 per cent from their previous number of 11 per cent. As for China, their 2021 GDP growth forecast for China is unchanged at 8.7 per cent. 

The European banking group is one of a cluster of large lenders that are issuing half-year growth, investment and asset allocation forecasts. So far, most appear to remain constructively positioned around equities and expect some inflationary pressures to build, although debate remains about how enduring any such pressures might be.

US equities are relatively expensive on a price/earnings multiple (about 23 times earnings for the S&P 500 Index), while the MSCI World Index of developed countries’ equities is just over 20 times, the Stoxx Europe 600 Index is about 18 times, the MSCI Asia ex-Japan Index is about 16 times, and the UK FTSE 100 Index of UK stocks is about 14 times earnings.

Deutsche Bank likes emerging markets in Asia because they are strongly geared towards an uplift in the overall global economy. The German bank predicts that the world’s GDP will grow by 5.8 per cent in 2021, and by 4.6 per cent in 2022.

“We see emerging market (EM) Asia as a whole benefiting from external demand recovery amid economic reopening, especially in the developed markets,” they said. 

“We expect higher returns in Asia ex-Japan (AXJ) equities compared to developed market equities in [the] next 12 months. Within AXJ, we are overweight towards China and South Korea markets as we are positive on tech-related sectors in Korea. While we are neutral towards the India market, we are underweight towards ASEAN and Taiwan markets. Chinese equities (especially Chinese tech) showed corrections in the past few months. We think this provides a good entry point for long-term investors,” they said.

In the fixed income space, Deutsche expects a “slight” upward revision of core government bond yields, and is neutral on periphery bonds. It is still “constructive” on emerging market Asia credit, because the bank says that this asset class should be supported by a stronger underlying economy, loose monetary environment, and investors’ hunt to find higher-yielding investments.

Interestingly, the bank was cautious about cryptocurrencies, aka digital assets such as bitcoin. 

“Cryptocurrencies (in some form) are probably here to stay, but they are still far from being a mainstream asset class. Even arguments for portfolio diversification or inflation hedging need to be treated with caution. We believe that the high volatility, lack of regulation, fraud risks and central bank digital currencies are barriers to a widespread adoption of cryptocurrencies,” it said. 

“We foresee visible price gains in commodities due to an economic reopening, with demand for oil expected to increase. For gold, higher US yields and the expectation of a slightly stronger dollar will limit attractiveness,” it said.

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