Santander Wealth Management: "European stocks maintain fundamentals and attractive valuation"

Santander Wealth Management, which groups together the private banking and asset management business at Banco Santander, estimates that global growth will slowdown—albeit slightly—in 2019 and that the solid expansive cycle will continue. In the report Navigating change in the cycle, produced jointly for the first time by Santander Private Banking and Santander Asset Management, the division run by Víctor Matarranz indicates that worldwide economic growth will register a 3.5 per cent increase next year (just three decimals lower than in 2018). “The United States and Europe will grow at their potential and China is reacting with a broad programme of incentives to continue with growth of above 6%”, he writes in the introduction to the report.

These forecasts are based on four factors: the absence of critical macroeconomic imbalances, the favourable financial position of households and businesses, the absence of inflationary pressures and expansive fiscal policies. All of this, combined with interest rates that are still low, expected profit growth of 9% and attractive stock market valuations, should bolster stock markets and generate investment opportunities. “The investment clock described above indicates that, at this point in the economic cycle, the ideal asset in terms of the risk-return ratio would be stock markets in developed economies”, according to the report.

Nonetheless, it warns that there are several economic, commercial and geopolitical risks that should be monitored. First, the Federal Reserve’s interest rate hikes, which are a focal point of monetary tension. Monetary policies will continue to be accommodating although they will contribute less to economic growth and adjustments by the main central banks are not expected to be pronounced. In the United States, an additional hike in interest rates of 25 basis points is expected this month and three more—of another 25 basis points each —are expected for next year. With regard to the eurozone, the European Central Bank (ECB) is expected to announce the first rise in the official interest rate during the second half of 2019. Other possible sources of uncertainty for next year are trade tensions between the US and China, and the UK and Italian negotiations with the EU.

Against this backdrop, in which markets could once again be subject to episodes of volatility, active, professional asset management is now more necessary than ever for maximising investment opportunities. Along these lines, and to take advantage of the changing winds in the economic cycle, the keys will be more diversified and dynamic allocation of assets than during a more stable cycle, a focus on fundamentals to actively manage portfolio risk levels; prudence when selecting assets, starting out from a constructive global positioning; and paying special attention to the management of credit risk and maximum diversification of geographies, sectors and issuers.

By type of asset, Santander Wealth Management recommends making the most of the increase in the yield premium for investment grade corporate fixed income (debt with the highest credit value), avoiding highly indebted companies. Secondly, it underscores the appeal of floating bonds, an investment alternative for times of increased market volatility and one of the most profitable in a scenario of rising interest rates.

With regard to stock markets, the report highlights European markets—with dividend yield of nearly 4%—as the most attractive asset based on fundamentals, with a focus on cyclical sectors for which double digit profit growth is expected, such as technology, industry and energy. As for the US, it remains neutral for equity and recommends rotation towards more defensive sectors, such as stable consumption and health.

As for currencies, the firm believes the US dollar should continue to appreciate in the first part of the year, but the trend may change as of spring. “USD positions could act as safe havens”, the report points out. “As of the second quarter, the EUR/USD trend could change towards its equilibrium level”, it adds.

About Santander Wealth Management
Santander Wealth Management is a global division that groups the Private Banking and Asset Management units of Santander Group. The division has assets under management of 333,000 million euros as at 30th September 2018.

Santander Private Banking serves 170,000 clients in the main markets in which the bank operates. Santander Asset Management is an international asset manager with strong local roots in Europe and Latin America that manages all types of investment vehicles.