In a letter to investors, Deutsche Bank’s global CIO outlined changes to the bank’s 2020 economic outlook. This details the implications of the coronavirus crisis, and how equity indexes and other asset classes are forecasted to perform for the twelve months ahead. One of the keep headline’s was the bank’s view of the S&P500, which they believe will trade above 3100 by the end of Q1 2021. While the German DAX at 12000 points.
The letter projected economic recovery for the next few months – expecting a strong start at first, followed by slow growth. Financial markets already anticipate improvement, and Deutsche Bank sees the likelihood that worldwide stock prices will be supported by low interest rates for an exceptionally long time.
Therefore, without any other alternative, investors will likely continue to bid for equities in search of higher yield. Due to this, high price/earnings valuations could reach historic levels. Deutsche Bank still sees the technology sector as the driving force to higher equity markets, due to strong fundamentals, large cash balances, and low debt. Tech is also viewed as one of the sectors to benefit the most from higher capital expenditure and fiscal stimulus.
All in all, low interest rates should support extremely high valuation multiples, and companies with strong balance sheets will benefit the most in the months ahead.
How About Commodity and FX Markets?
One year from now, gold is still seen at around the current levels – $1800 is Deutsche’s forecast. The main argument here is that gold, while still viewed as a safe-haven asset, tends to suffer from investors’ run to liquidity needs in dire times. As we have seen already at the start of the coronavirus crisis, the initial reaction on the price of gold was correlated with equities – lower, due to investors selling assets for cash.
The 12 months WTI oil futures contract is seen at $37, mainly due to a gradual rise in demand. If the pickup from Chinese economic activity continues, the demand should balance high supply as the main producing states reduced output significantly.
An interesting point made by Deutsche comes out of the FX market. The JPY is seen strengthening all over the dashboard, with large gains against both the USD and the EUR. The USDJPY exchange rate is seen at 105 in the months ahead, while the EURJPY is seen dropping at 115.
This is mainly correlated with the risks ahead – the big unknown regarding the end of the coronavirus crisis and the US Presidential elections in the last part of the year.