In its latest economic forecast, Aegon Asset Management's experts predict that the tide will turn over the next few years. It anticipates a short downturn in economic growth that will affect most developed global markets.
Furthermore, the company predicts that the United States expansion phase, which has been exceptionally long, will start to show signs of late cycle economic behavior that may result in a wider reaching slowdown of several markets around the world.
Olaf van den Heuvel, Chief Investment Officer of Aegon Asset Management Netherlands explained, "Labor growth can no longer continue to be the main driver of economic growth in the United States, as the economy is at full employment.
"Corporate leverage has also increased, which makes corporates more sensitive to higher interest rates. Therefore, we expect that the economy can continue on its growth pattern for about a year, but expect a mild recession around 2019 which will as a result impact many developed markets globally."
Tightening monetary policy
He continues, "We expect the Federal Reserve to continue tightening its monetary policy stance and expect the ECB to taper the asset buying program during the course of 2018. These changes in monetary policy will of course lead to changes in the markets, some less than others."
Forecast 2019 - 2021
Aegon Asset Management estimates that the valuations of most fixed income asset classes are stretched and risk premiums are not sufficient enough to protect for the effects of monetary tightening and the economic slowdown foreseen in 2019.
According to its investment analysts, the basis scenario has a 60% chance of actually being achieved, the negative scenario a 15% chance and the positive scenario a 25% probability. More about these scenarios can be found in the full report, 'The Tide is High - But for How Long'.
The company also sees equity markets as having a limited upside potential due to their rich valuations. "We prefer Dutch mortgages and ABS within the fixed income space and expect these categories to perform well in an environment where interest rates increase and the economy reaches the end of the cycle," says Van den Heuvel.
"In contrast, with regard to Eurozone bonds and High Yield investments (in Europe and the United States), we predict these categories to suffer most given the mild economic downturn for 2019. Moreover, we prefer Listed Real Estate investments over global equity markets."