Macro report: We are experiencing a large economic downturn, but no recession yet

Aurel Dragan 11/04/2019 | 12:49

OTP Asset Management published the market analysis “Spring-Summer Trends 2019” and announces the distribution of the dividends for the first quarter, amounting RON 3.5549 per unit fund. The fund performance in the first quarter was 8.55 percent.

In retrospect, 2018 went from synchronised growth to unbalanced growth and we are experiencing a large economic downturn, but no recession, at least not yet. Still, GDP growth may slow down to 3.5 percent this year and the volatility of the financial markets will remain high throughout the year.

Starting with 2019, the era of ultra-relaxed monetary conditions seems to have ceased.  Higher interest rates in the US and appreciation of the dollar have led to tighter financial conditions around the world, generating negative effects of contamination, especially in emerging economies with weaker economic grounds, such as Argentina or Turkey.

The trade tensions between the two largest economies of the world, the US and China, have provoked headaches for investors in financial markets and have started to threaten the global economy growth. At the same time, the British saga on Brexit and the Italian budget problems have created additional worries in Europe. All of these factors have fuelled fears regarding the global downturn in the global economy.

The Eurozone also saw an unexpected slowdown amid fears about Brexit, but also due to production difficulties in the automotive industry or mass “yellow jackets” protests in France.

“Considering this context, in our baseline scenario, we expect that during 2019 the economic growth rate will continue to diminish in all key world economies, without entering a real recession this year. Moreover, we believe that a future recession may be less severe than in 2008,” shows the report that the company released.

Concerning Central and Eastern Europe, strong domestic demand, fuelled by favourable labour market conditions, as well as European funds, can provide sufficient support for robust growth this year, but a slowdown is to be expected due to the weaker Euro area economy.

“Regarding Romania, we expect a GDP growth of 3.5 percent in 2019. Similar to previous years, household consumption could be the main driver of economic growth. We expect investment to grow moderately in 2019, as the positive effect of European funds absorption and pressure on companies to improve productivity could be partly offset by lower investment in the energy, telecom and financial sectors,” shows the report.

The current level of the NBR benchmark interest rates, together with prudent liquidity management, could remain at the same level in 2019. However, in the medium term, a modest increase in the interest rate may be necessary to keep inflation well connected to the target.

Pro-cyclical and unorthodox fiscal policies, as well as the relatively high and rising current account deficit, signal the build-up of vulnerabilities. Therefore, it is expected that the NBR will remain very vigilant.

“With regard to developments in global financial markets, we believe that 2018 marks the entry into the last phase of the economic cycle. We stand by our view that globally there is still a place of economic growth, but limited, on the current cycle. For this reason, we prefer sovereign quality bonds (investment grade), against corporate ones,” shows the report.

Since the liquidity is very important in the current conditions of the market, the analysts recommend giving up liquidity selectively and only for “extremely attractive returns” and under controlled risk conditions.

“We are optimistic about the evolution of the RON bond funds in the coming period, given the opportunities offered by EURRON swaps,” shows the report.

The evolution of global stocks during 2019 seems to be driven by the results of the trade war between China and the US. This means that volatility will remain at high levels in 2019, due to the fact that the US is at the end of the economic cycle, with political and macroeconomic risks rising globally.

The local capital market will remain heavily influenced by two important factors. On one hand, the projected budget deficit for 2019 will make the majority shareholder of state-owned companies demand generous dividends, again, from these companies. On the other hand, the implications of modifying the current functioning system for Pillar II of privately administered pensions are very difficult to quantify right now, but if the current form will be drastically modified, there will be negative effects in the short and medium term. Under these circumstances, it is expected that Romania’s goal of moving to emerging market status will go away indefinitely.

Commercial war and populist slippages are the main threats for financial markets during 2019.

Also, OTP Asset Management Romania SAI SA announces the distribution of the first quarterly dividend to the investors of the OTP Real Estate & Construction Fund. The payment is due to all investors registered in the Unitholders Register on April 1, 2019. The amount of the distributable income for the first quarter of 2019 is RON 3,555492759 lei per fund unit.

The return of the open-end investment fund OTP Real Estate & Construction, the only diversified investment fund in Romania offering exposure to global real estate markets, was 8.55% in the first quarter of 2019.

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