2019 Outlook: Global equities

A decade after the global financial crisis, a mixed bag of growth

Dec 27, 2018 | Nick Mustoe

Key takeaways

  • The overvaluation of structural growth stocks, such as technology stocks, is unsustainable, in our view.
  • For markets used to easy money, the transition to a more ‘normal’ period for central banks is likely to pose a challenge.
  • The European market looks a lot more attractively valued than the US, especially those stocks more sensitive to the direction of the economy, such as banks.

The outlook for global growth has become more mixed. While the synchronised economic expansion that I discussed in this piece last year is less widespread today, it should still be sufficient for corporate earnings to grow. Amid continued regime change – quantitative easing has given way to quantitative tightening, and interest rates are rising – the US continues to press ahead, while there is less momentum elsewhere.

 

In the 10 years since the global financial crisis, what does this mean for global growth? We see the US continue to be propelled by fiscal stimulus and still-supportive domestic financial conditions. Europe and Japan are following at a still-healthy but clearly decelerated pace. In the meantime, China’s economy is losing steam and it is unclear how successful attempts to reinvigorate activity through renewed credit and fiscal stimulus can be against the backdrop of leveraged balance sheets and trade tensions with the US. The uncertainties over global trade, combined with the tightening of dollar liquidity, are weighing on emerging market economies across regions, even if to different degrees.

 

We’re clearly in a phase of transition now that we are entering a more ‘normal’ period for central banks globally. For markets used to easy money, it’s unlikely to be an easy transition. Expect bouts of volatility along the way. Even the two-day rally at the close of October 2018 couldn’t rescue global stock markets from a dismal reality: It was their worst month in more than six years (since May 2012). Discouraging earnings forecasts from some of the world’s largest technology groups had triggered a wider sell-off, reigniting fears that the longest bull market in history had come to a halt.

 

Overall, it’s a positive story for most equity markets, and third quarter corporate earnings on both sides of the Atlantic have offered some reassurance. However, financial markets have been beset by worries for some time over rising interest rates and a slowing global economy. At the top of the list are concerns that the US/China trade relationship is likely to continue to worsen into year’s end; that US tariffs on Chinese goods are set to move higher in a few months; and that trade talks have broken down.

 

The transition could be all the more stark for the US equity market given that it was supported in 2018 by a one-time repatriation of earnings held abroad by US corporates, with much of the money used to buy back stock or increase dividends. As we go into 2019, however, it is unlikely that the US equity market will remain as well-supported on this measure as in the previous year.

 

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