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Still room for improvement: "Investors underestimate the upswing"

Who would have thought that in the eurozone countries, the economy is growing faster than it has been since 2011, and even in emerging markets, the economy seems to be self-sustaining.

However, the longer the cycle lasts, the more investors fear its end - and not altogether unfounded: the output gap of the G7, ie the difference between actual production and economic potential, is shrinking. Meanwhile, not only in Germany, the United Kingdom and Canada, but also in the United States is almost full capacity.

However, if the economy grows just above the trend, economies can still outpace potential growth for a long time before they reach their zenith. That's what our analyzes have shown. Sufficient spare capacity in Europe also shows that industrialized countries still have a considerable output gap. We therefore believe that we are still years away from the peak of the economic recovery.

Global recovery supports emerging markets

In particular, Japan and Asian emerging markets may find it difficult to repeat the surprisingly strong 2017 earnings growth in 2018. However, the steady global upturn, firm trade and stable commodity prices should help the region. The chart below illustrates the recovery in oil and commodities in 2014 and 2015 and shows that emerging markets still have catch-up potential.

A slight economic slowdown in China could, in our view, easily put off emerging markets. We also see growth momentum as many emerging markets are in earlier stages of the upswing than the developed world.

Brazil and Russia have left the recession behind, India is recovering from the growth slowdown caused by reforms. This should give tailwind for equities. For emerging market bonds, we expect coupon-like market returns. The reason: The encouraging factors of 2017, such as low US interest rates, weak US dollar, growth acceleration in China and monetary easing in emerging markets are reversing or ebbing away.