While actions by the U.S. Federal Reserve could hold promising results, international monetary policy announcements have held less and less power this year, according to a new economic and market outlook update from Deutsche Bank Private Wealth Management.
"We've been in a market environment that's become very reactive to, even a little addicted to, monetary policy or general policy pronouncements," Benjamin A. Pace III, chief investment officer and head of global investment solutions at Deutsche Private Wealth Management in the Americas, said at a presentation in New York on Thursday.
That comes as it emerged on Thursday that the U.S. Federal Reserve is poised to take on a massive new round of bond buying to boost the U.S. economy, while Europe has also made headlines this week when a German Constitutional court decided in favor of a bailout fund for the region.
"The shelf life of effectiveness of these monetary policy pronouncements is getting shorter and shorter, and what you really need particularly in Europe is some kinds of move toward a banking union," Pace said. "What the monetary policy pronouncements have done is lower the risk substantially of an outright credit freeze."
Policy moves in Europe seem to have eased fears that a country like Greece could tip the region into the same kind of credit freeze that Lehman Brothers pushed the U.S. economy into in 2008, according to Pace. At the same time, the U.S. will need to address the fiscal cliff-the expiration of the Bush-era tax cuts and simultaneous spending cuts-before it has a negative impact to GDP.
"We do think it's going to be an eleventh hour type of settlement and there will be angst around that as we get into November, December," Pace said.
That comes as Deutsche predicted growth for the U.S. economy and a recession in Europe in 2012 last December. But GDP growth has come in at less than the 2% to 2.5% that Deutsche predicted for the U.S. then, while limited growth in Europe has pushed them the region toward slow growth. Emerging markets, meanwhile, are seeing their own central banks tightening in reaction to excess demand.
For the equity markets, 2012 has shaped up to be a positive year, with a 14% gain so far this year. Central bank actions have helped bolster that growth, according to Owen Fitzpatrick, head of U.S. large cap and equity strategy at Deutsche Asset Management.
"Historically when central banks ease, it takes time for that to filter through and impact economies," Fitzpatrick said. "Equities tend to move in advance of that, and I think we've seen a classic case of that here in 2012 where equity prices have moved higher."
The equity markets show industries that are growing, with evidence of strong secular themes with this week's unveiling of Apple Inc.'s iPhone 5, Fitzpatrick said. Wireless and storage have showed strength in equities, he said, as well as areas like healthy eating that includes companies that supply organic food or distribute it.
Deutsche is overweight most when it comes to energy equities, followed by technology and health care. At the same time, the firm is underweight for equities sectors including consumer staples, telecom and utilities.
For fixed income, rates will probably move up to a new low level in early 2013, which would be higher than where they are today, said Gary Pollack, head of fixed income trading and research at Deutsche Bank Private Wealth Management in the Americas.
Deutsche is favoring a yield curve between three to eight years for intermediate buyers, Pollack said. That comes as a nine to ten year curve would probably see rates rise, he said, while in one to three year time frame the Federal Reserve will be putting out its interest rate guidelines.
The firm also still likes the municipal sector, even as negative events including unfunded pension liabilities, budget deficits and bankruptcies have damaged their reputation with some investors. But triple-A municipal bonds are now yielding more than treasuries, Pollack said. Within the municipal sector, the firm is overweight states and underweight localities.