2019: where do we stand?

MAIN CONVICTIONS 

GLOBAL CROSS-ASSET STRATEGY

In 2018, US president Trump and his “America First” policies gave US equities a boost that ended in Q4. At the end of the year, there was no place to hide for investors. Global growth was slowing down and investors were getting spooked. Cyclical stocks, especially, were hit, across all regions. What’s next? Where do we stand now? And which regions are most likely to catch up? For now, we recommend a regional diversification in equity holdings via exposure to the US, Eurozone and Emerging markets. 

Up until Q4 2018, US equities were, in terms of performance, ahead. However, slowing growth, geopolitical uncertainties, e.g. the trade war with China, and domestic political issues, e.g. a partial government shutdown and Democrats winning control of the House of Representatives, finally caught up with them, too. By the end of the year, there was no place to hide for investors. 

That said, US macroeconomic fundamentals remain reasonably solid. The labour market is strong, wages are increasing, oil prices have declined and, with the recent market correction, valuations have fallen.

In the Eurozone, European economic policy uncertainty is still on the increase, hitting the domestic equity market in particular and adding a risk premium. First and foremost, the Brexit deal (or no deal) is weighing the most, followed by country-specific challenges in France, Germany and Italy. Besides the political noise, it cannot be denied that fundamentals have weakened further than they have stateside. However, Germany, the Netherlands, France and Italy have already committed to looser fiscal policies and wage increases to avoid too harsh a slowdown. 

Emerging countries have been the most penalised since the beginning of the trade war and slowing global growth. But, overall, the broad region, especially Latin America, has been able to take a breather lately, thanks to the strengthening of Emerging market currencies, the stabilisation of the US dollar, and through a couple of promising electoral campaigns followed by the election of the preferred candidates. 

China has been the main target of the Trump administration and on the receiving end of the trade tariff increase. A decrease in exports would undoubtedly negatively affect their GDP growth. The country is, however, firmly set on avoiding this and is using all the necessary tools at its disposal to mitigate the impacts, including fiscal and monetary measures, not to mention a devaluation of its currency, a measure that has succeeded in offsetting the early effects of the customs tariff hikes.

In this context, we still prefer equities to bonds as we expect a moderate equity market rise in 2019. In terms of fixed income, we expect the interest-rate differential between the US and Europe to remain high and only to gradually diminish, on the long end of the curve to begin with. The main risk to our soft-landing scenario remains geopolitical and trade uncertainties.