Global economic growth should slow slightly in 2019 but remain healthy, which we believe should pave the way for equities to regain their footing and outperform.
Our investment themes for 2019 include: Interest rate normalization; Regional economic divergence; New geopolitical regimes.
The year ahead
Global economic growth in 2019 should be healthy but slightly slower than in 2018, while capacity constraints point to a modest rise in inflation in the USA, Eurozone and several other developed markets (DM). This will allow central banks to continue to cautiously normalize monetary policy in what we expect could be an extended economic cycle. Against this backdrop, we believe equities should regain their footing and outperform.
Slower but steady growth
The impact of US fiscal stimulus will likely peak during 2019, but growth should remain above trend on the back of robust corporate capital expenditure, hiring and wage growth. In China, US tariffs, sluggish manufacturing investment and slowing consumption growth are likely to act as constraints. In Europe and Japan, still lax monetary conditions should help maintain moderate growth momentum. Despite a moderate recovery of productivity growth, core inflation is likely to gradually move higher as wage growth picks up, with commodity prices an upside risk.
Our preferences for 2019
We continue to hold a moderate growth tilt in portfolios and recommend a small overweight in equities given our expectations for still robust earnings growth. However, US investors should begin to lengthen bond duration, given our expectations for a moderate rise in yields, as well as limited potential for rates to increase much beyond what markets are already pricing. In lower yielding core bond markets outside the USA, where central banks have yet to start raising rates, we recommend keeping duration short. Valuations for emerging market (EM) bonds and currencies are attractive after coming under pressure in 2018, but China poses risks, and the same holds true for EM equities. We would nonetheless expect EM equities to outperform as long as the risk of US rate hikes and USD strength abates. Regarding the USD, we expect some weakness against other major DM currencies. In credit, high yield seems to offer a better risk-return trade-off than investment grade bonds given the recent widening in spreads. Demand for commodities should remain robust and inventories are likely to continue to fall, suggesting higher prices for cyclical commodities.
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Our investment themes for 2019 include: Interest rate normalization; Regional economic divergence; New geopolitical regimes.
The year ahead
Global economic growth in 2019 should be healthy but slightly slower than in 2018, while capacity constraints point to a modest rise in inflation in the USA, Eurozone and several other developed markets (DM). This will allow central banks to continue to cautiously normalize monetary policy in what we expect could be an extended economic cycle. Against this backdrop, we believe equities should regain their footing and outperform.
Slower but steady growth
The impact of US fiscal stimulus will likely peak during 2019, but growth should remain above trend on the back of robust corporate capital expenditure, hiring and wage growth. In China, US tariffs, sluggish manufacturing investment and slowing consumption growth are likely to act as constraints. In Europe and Japan, still lax monetary conditions should help maintain moderate growth momentum. Despite a moderate recovery of productivity growth, core inflation is likely to gradually move higher as wage growth picks up, with commodity prices an upside risk.
Our preferences for 2019
We continue to hold a moderate growth tilt in portfolios and recommend a small overweight in equities given our expectations for still robust earnings growth. However, US investors should begin to lengthen bond duration, given our expectations for a moderate rise in yields, as well as limited potential for rates to increase much beyond what markets are already pricing. In lower yielding core bond markets outside the USA, where central banks have yet to start raising rates, we recommend keeping duration short. Valuations for emerging market (EM) bonds and currencies are attractive after coming under pressure in 2018, but China poses risks, and the same holds true for EM equities. We would nonetheless expect EM equities to outperform as long as the risk of US rate hikes and USD strength abates. Regarding the USD, we expect some weakness against other major DM currencies. In credit, high yield seems to offer a better risk-return trade-off than investment grade bonds given the recent widening in spreads. Demand for commodities should remain robust and inventories are likely to continue to fall, suggesting higher prices for cyclical commodities.
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