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09-01-08
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Market Commentary: What will 2008 bring? Base scenario and investment trends for the financial markets
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From the investors' point of view, 2007 has proved to be a challenging financial year. Among equity markets, the emerging markets turned in an above-average performance, whereas
in the mature markets, particularly Switzerland, the stock markets failed to come up to expectations. The main reason for this development was the subprime mortgage crisis, which
has been roiling financial markets since August. The financial industry was hit hardest, which is reflected in the performances of the Swiss and British stock markets, in which
banks and insurance companies account for a significant proportion of market capitalization. In Switzerland, corporate earnings will be lower than in the previous year for the
first time in five years primarily because of the losses of the big banks; in the USA, earnings will more or less stagnate at the prior-year level.
For 2008 we are working on the premise that the US housing slump, and thus the crisis of confidence in the financial system, will persist for some time, and with it volatility in
the equity markets. A crucial factor will be the point at which US housing prices will at least stabilize. Owing to the existing supply overhang of single-family homes, this is
unlikely to materialize before the second half of the year at least.
What are the key investment themes for 2008?
1. Equities will outperform bonds
Despite the continuing crisis of confidence, we expect that for 2008 as a whole equity markets will produce respectable returns, although accompanied by bouts of high volatility.
According to our forecasts, the second half of the year will turn in a better performance than the first half. Uncertainty about the US housing slump will be particularly
pronounced in the first months of the year, when companies announce their earnings for the 2007 financial year. Swiss companies are likely to report impressive earnings growth in
2008, but only because 2007 profits set a very low starting base. The same holds for the USA and to a lesser degree for Europe as well. Only companies in Asia and selected
emerging markets are expected to report notably higher earnings. Unsurprisingly, the region is once again a favorite among analysts for 2008. Swiss small caps will probably have a
narrow edge in the first six months of the year, after which we expect large caps to stage a comeback. Finally, the November elections in the USA should be positive for
equities.
Bonds will operate under the influence of rekindled concerns about inflation on the back of higher commodity prices. Expectations of higher interest rates in bond markets will
reduce the attraction of fixed-interest paper compared to other asset classes. An important consideration for 2008 is the need to invest exclusively in top-rated paper. Overall,
bonds remain underweighted in our portfolios.
2. Commodities remain attractive for investors
In 2007, commodity prices developed unevenly against the transcendent backdrop of a near doubling in oil prices. With regards to oil, we expect prices to ease in the short term in
the light of full reserves and some slackening in global demand. However, the medium-term trend remains bullish, as there is little spare capacity to increase production. By
contrast, prices of soft commodities such as wheat and corn should continue to trend higher on the back of strong demand. In addition, a weak US dollar should provide support for
the gold price.
3. Alternative energy remains in the spotlight
The general trend towards higher energy prices and the increasing significance of climate change have served to keep the spotlight trained on alternative sources of energy.
Investors who sought exposure to equities in this sector through e.g. the Vontobel Fund Global Trend New Power were rewarded with double-digit returns. We expect that the
relevance of this topic will continue to grow in 2008 and benefit from further active political support.
4. Growing importance of portfolio diversification
Times of elevated uncertainty are characterized by volatility: for instance, an investment class that has just been out of favor may suddenly turn into a winner, and vice versa.
Another characteristic is the greater probability that the main scenario is superseded by some other development. In such times it is important to structure portfolios so that
they perform as well as possible even if the market development does not unfold as forecast in the main scenario. Our balanced investment products such as "MACS", "DACR" and
"classic VV" are particularly suitable in such situations.
5. Where do the risks lie for the economy and financial markets in 2008?
It is crucial to restore investors' confidence in the banking system and the confidence of banks in one another as quickly as possible. Failure of this to materialize in the
course of the current year would constitute a huge risk for the economy. If the US housing market does not at least stabilize and, instead, the real estate crisis spreads to the
rest of the world, the outlook would be even more negative than we expect.
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Dr. Thomas Steinemann
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| Chief Strategist of the Vontobel Group |
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| +41 (0)58 283 78 44 |
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Contact
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