Confident Talk in Volatile Economy

Stefan Kreuzkamp says traders might have this look on their faces for a while yet.
  • Why it matters

    Why it matters

    Volatile markets have been giving traders a headache since the start of this year. Mr. Kreuzkamp’s hope is that the global economy remains on a stable footing.

  • Facts


    • The 50-year-old has worked since 1998 in the investment funds department of Deutsche Bank, where one of his positions was head of bonds.
    • Mr. Kreuzkamp figures on 3.4 percent global growth in 2016, due in part to slower growth in emerging nations.
    • He expects oil prices to stabilize at $35 to $40 per barrel by mid-year, meaning profit forecasts for the 500 largest U.S. should start to rise again.
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Stefan Kreuzkamp isn’t one to sugarcoat recent troubles in stock markets. He says investors will have to endure big swings in share prices for a while. But in an interview with Handelsblatt, the 50-year-old strategist said he doesn’t believe the financial world faces the same dangers it did during the 2008 crisis.

Markets will continue to be driven by slower growth in emerging nations and low oil prices. But problems that drove the world’s last financial crisis — like the U.S. real estate bubble, billions in bad loans and related job losses — aren’t a factor today, said Mr. Kreuzkamp.

Mr. Kreuzkamp is responsible for investment strategies at Deutsche Asset Management and recently also took over active managed funds and the European region. The Deutsche Bank subsidiary is one of the most profitable at Germany’s largest bank. It manages the assets of institutional clients and mutual funds, with €777 billion in customer assets.

Mr. Kreuzkamp, how do things look on the stock markets?

The ups and downs in share prices are gripping our attention. Since the beginning of the year, stock markets are under considerable pressure. For one, the price of oil has fallen to a record low. Also, the economic slowdown in China is at the epicenter of the earthquake and is one of its causes. In other words, markets will remain volatile for a while. Things weren’t much different in 2015: Share prices developed quite well until the end of April, and for the rest of the year investors could only gnaw at the meat on the bone, so to speak.

Things weren’t much different in 2015 — share prices developed quite well until the end of April, and for the rest of the year investors could only gnaw at the meat on the bone, so to speak.

What does all this mean for investors now?

The fact that losses are coming so early is already putting investors under pressure. There is particular impact on investors who work with risk budgets in multi-asset portfolios with various classes of assets. These more conservatively-oriented funds are feeling stress because in some cases their risk budgets are already exhausted. This year some of them had to sell instruments with price risks, such as stocks, already in the first weeks of trading.

What is the outlook for bank stocks?

Bank stocks are suffering because of weak profit margins caused by low interest rates, problems at individual companies and the pressures of regulation. A pause in regulations for banks would do us good. Cheap money from the European Central Bank is scarcely reaching the economy because loans are not being issued. Studies show that bank credits are still responsible for 90 percent of company financing. A few banks in Europe simply don’t have the capital necessary for providing a massive impetus to lending.

How strongly are China’s stock markets reacting?

China is no longer a typical emerging country, nor does it yet have a fully developed stock market. This means, compared to volumes in the western world, small orders are enough to move the market. And at the beginning of the year, applying the system for stopping trade after significant losses didn’t lead to a real consolidation of the overheated market. International markets suffered accordingly — because investors who didn’t get out of the Chinese stock market safeguarded their positions with derivatives on leading stock indexes. Now Beijing has pulled the plug again on the whole thing. So we expect the Chinese market to remain volatile.

So does the global economic environment explain the turmoil in stock markets?

No, it has scarcely changed in the last 10 weeks. The global economy is continuing to grow even if, because of slower growth in emerging nations, we are now reckoning with 3.4 percent growth in 2016, instead of 3.5 percent.


Stefan Kreuzkamp is the top investment strategist of Deutsche Asset Management. Source: Deutsche AWM


Are you pessimistic about China?

No, but we don’t believe in the perpetually proclaimed growth rate of 7 percent – because of the shift from an energy-intensive, industry-based economy to a consumer-oriented one. China has probably achieved half of this transformation. The traditional sectors are not experiencing strong growth. This means the service sector would have to increase by about 14 percent in order to meet Beijing’s forecast. We don’t believe this will happen. For 2016,  we believe growth of 6 percent is possible.

What does that mean for the markets?

Investors haven’t yet realized what the transformation in China will bring: fewer products, more consumption. For that reason, we are not surprised by the weaker values for China’s manufacturing sector. But what we desperately need is more transparency in the services sector. There is also a lack of dependable data concerning liberalization on the capital markets. So investors cast a critical eye on Chinese stocks and also the yuan.

Where is the currency headed?

In recent years, the yuan has fallen in value compared to the dollar. And starting in October 2016, the yuan will be included by the International Monetary Fund in its basket of the most important global currencies – and will then have to be pegged in value with respect to the currency basket. The basket currencies of the euro, yen and pound sterling have declined in value with respect to the dollar. So the yuan can be expected to weaken further when this recognition penetrates the markets. This could lead to a further sell-off of stocks.

Is the Chinese central bank promoting a weaker yuan?

Yes, I assume the central bank will continue to pursue an expansive policy. And as Europe shows, as a rule that leads to a weaker currency. There are certainly a few more percentage points of devaluation.

How do things look in the United States, the world’s largest economy?

The U.S. economy is growing at 2.5 percent annually. Many new jobs are being created, inflation is moderate and prime rates are extremely low. The economy is stronger than is currently reflected in stock prices. But an S&P 500 index with a price-to-earnings ratio of around 16 to 1 is not really favorable, even if it recently came down from 18 to 1. Company profits already shrank in 2015 by a clear 2 percent — because an important group of large U.S. companies is dependent on the energy sector.

Where is the price of oil headed?

We expect a stabilization – at $35 to $40 per barrel by mid-year. This would mean that profit forecasts for the 500 largest U.S. would rise again. We predict average profit growth of around 5 percent for 2016. But that is less than our forecast for 2015.

When will the positive effect of cheap oil kick in?

A further fall in oil prices would be disruptive to markets. Because in the short term, the negative effects on the economy are stronger. For instance, it puts pressure on high-interest bonds in the United States, which are strongly influenced by the energy sector. Investments in U.S. shale oil are being scaled back by half, because many producers are out of money. That creates further unrest on the markets.

The price of oil is keeping inflation down in the euro zone. Will the head of the European Central Bank, Mario Draghi, stoke the fires?

Mr. Draghi has already announced he will extend the program of purchasing bonds until March 2017 and re-examine monetary policy in March. I believe it is highly likely that the European Central Bank will expand its bond buying to perhaps €70 billion or €80 billion, and also extend the program to include corporate bonds.

What gives you reason to hope that the ECB’s policy moves will finally have an effect?

The U.S Federal Reserve did the same thing five years ago. The procedure can be transferred to the euro zone because the European Central Bank buys bonds in individual countries according to the capital key. The Fed brought down interest rates, bought massive quantities of bonds and weakened the currency. That worked. Once again there is growth and high employment with a stable rate of inflation in the United States.

And the current uncertainty?

The head of the Fed, Janet Yellen, has already tried to calm down investors. Every movement has effects on U.S. prosperity, because 40 percent of Americans own stocks. For 2016, we expect two interest rate increases to 0.75 percent or 1 percent. What is important is that the central banks communicate clearly, as they have done recently.

Mr. Draghi’s recent announcement had a calming effect for only two days.

The markets are unstable in a technical sense. Important support lines have fallen on the (German blue-chip) DAX index and S&P 500. There is room for further downward movement. Many investors have almost or completely used up their risk budgets. And when the next sell-off comes, even if only these sorts of support lines fall, they pull the ripcord and sell – even if nothing has changed in the economic situation.

When will the stock markets quiet down?

It may take until this summer for the markets to stabilize.

What could be of help here?

In view of the current state of the capital markets, we need positive impulses from the markets so no downward spiral begins there, and also from the economy itself. The former includes a stabilization of the oil price and a clear slowing down of the expansion of risk premiums for more risky loans. The latter depends on good economic figures from the United States and China. For the U.S. economy, we continue to hope that the first quarter of 2016 will improve in comparison to the fourth quarter of 2015, and that companies issue confident forecasts.

You aren’t impressed by recent data or doubts by some U.S. critics about the robustness of the economy?

The uncertainty can’t be denied. But the most recent employment figures show the U.S. economy is continuing to improve.

Can the recent turmoil in stock markets be compared with the financial crisis of 2008?

No. The problem that we’re pushing along in front of us is far from being as big as the one in 2008. Back then, the problem came from the real estate market, where $12 billion in loans had gone bad. The current problem is in the U.S. energy sector, where there are unpaid loans of a little less than $1 billion. Back then almost 8 million jobs in the construction industry were affected. Currently 200,000 people work in the U.S. energy industry – that is an entirely different order of magnitude.


The interview was conducted by Anke Rezmer, who covers financial markets for Handelsblatt in Frankfurt. To contact the author: 

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