Time for inflation
Vontobel’s fund selection is done in Zurich by a five-member fund selection team, which creates an approved list of roughly 250 funds.
However, Haupt can influence the fund selection. “If we see something interesting from Asia and think it could be interesting for clients, we can propose it and they have a look.”
However, there is no particular focus on local markets yet because the bank is cautious on emerging markets. “We don’t yet know the policies in the US and the dollar strength impact on [Asian] currencies,” Haupt said.
In 2017, the firm has two US investment scenarios. Common to both is a rise in inflation, which the bank believes will be 3%.
A reflationary scenario has the highest probability (60%), according to the firm.
This unfolds if the Trump administration’s policies – driven by fiscal spending – generally play out. Then economic growth, inflation and the budget deficit rise, Haupt explained. There would be three rate hikes. “For the US, the pro-growth agenda and Trump’s policies would turn out positive for the economy.”
In a stagflation scenario, which has a 40% probability, Trump implements a pro-growth and anti-globalization agenda. “That results in lower foreign trade, lower growth and higher inflation and there would be two rate hikes.”
USD strength
Given the inflation forecast, the bank has high conviction on the US dollar and also has a strong overweight in cash to exploit tactical opportunities. With cash, the returns are more attractive than government bonds, which in some European countries are negative yielding, Haupt explained.
Fixed income gets a significant underweight, particularly government bonds. There is no exposure to EM bonds due to the potential impact of Trump’s as-yet-unknown trade policy and US dollar strength, Haupt explained.
In Europe, he believes economic growth is underestimated because it is in the shadow of rising populism and upcoming elections in Germany, France and the Netherlands. But in terms of economic growth and companies, “Europe is well positioned for 2-3 years of double digit EPS growth,” Haupt said.
Still, the bank is neutral on the whole equity asset class. The same weighting goes for precious metals and commodities, high yield bonds and alternatives.
Gold also gets a neutral. “It seems to be an attractive hedge against political uncertainty but due to dollar strength it gets a neutral.”
