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Amid Uncertainty, Deutsche Bank Strategist Sees a Sunny 2019

Volatility and political risks are rising, but tax cuts have been a boon, CIO Puri says

Friday, January 18, 2019

By Juliette Fairley

Consumer discretionary spending will keep the U.S. from falling into recession, according to Deepak Puri, chief investment officer and managing director of Deutsche Bank Americas Wealth Management.

“Within consumer discretionary, we prefer hotels, restaurants and entertainment, Puri said in a January 7 presentation to media. “The economy is showing positive hiring trends on average hourly earnings and labor force participation, the unemployment rate is very low, oil prices are down, which acts as a tax cut or relief for the average consumer, so it should relate to more spending power.”

Also contributing to the positive 12-month outlook is an expected rise in bank deposits, in turn fueling loan growth. But Puri, in line with other observers, is wary of credit quality and how a decline might affect the economy.

“The monetary policies which were very accommodative are now starting to become a little bit more hurtful to the overall risky assets,” while corporate earnings growth is slowing. S&P 500 company earnings in 2018 rose 28% year-over-year; that is projected to decline to 7.5% in 2019, according to First Call data.

“Valuations are becoming more attractive,” Puri said, predicting “a significant impact on equity returns five years out, making equity markets much more appealing to today's investor than it was six months ago.”

“Mid-Volatility Regime”

But likely to accompany rising equity markets is volatility.

“Historically for the last 10 years, we had been in a low volatility environment where the CBOE Volatility Index (VIX) is below 12,” Puri observed. “Now we are entering a mid-volatility regime between 12 and 18.”

The investment firm therefore favors structured products in regions and sectors that benefit from volatility, such as financials, industrials, IT, communication services and healthcare.

“Some of these healthcare companies pay dividends, so this could be a year where dividend-paying companies become appealing to investors again,” Puri said.

Market-Friendly Outcomes

He sees insurance companies, after dealing with major weather events in 2018, bouncing back on the strength of premium increases.

Political or geopolitical risks on his radar include those stemming from the U.K.'s Brexit, sanctions on Russia, and the new administration of Brazilian president Jair Bolsonaro.

“We're keeping an eye on any trade escalation between China and the U.S,” Puri said. “If trade uncertainty between China and the U.S. were to fade away, industrials is the direct way to play a resolution in the U.S.-China trade war, because when you look at the industrial component, in aerospace and defense, it is likely the most hit by the rhetoric.”

Despite the volatile Washington environment and the border wall controversy, “most of the administration's policies have been quite market-friendly, especially the tax cuts, even though that's been fading out a bit,” Puri said. “In lieu of more tax cuts that can propel the market, we are waiting for the next catalyst that will cause equity markets to rise.”




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