2019 Outlook: Global Multi-Asset

The prolonged global expansion could continue if fiscal and monetary policies remain supportive

Dec 28, 2018 | Clive Emery

Key takeaways

  • We take a two- to three-year view of the world when building our central economic thesis.
  • We believe it is vital to consider both cyclical and structural forces in building this thesis.
  • We must believe that all of our ideas can make a positive return in our central economic scenario to ensure we have ideas that can excel in various economic conditions. However, it is important to note that our ideas do not derive from it.

2018 has been a relatively volatile year, however this has been limited to bouts of volatility while, rather surprisingly, levels of market volatility overall have remained fairly subdued.

 

Throughout 2018, we have seen a blow-up of exchange traded funds (ETFs) that were designed to benefit from falls in the VIX index, a large election surprise in Italy, further US sanctions on Russia, another International Monetary Fund bailout for Argentina and more general pressure on emerging markets (EMs) from the strengthening of the US dollar and increasing US interest rates. There has also been heightening rhetoric around trade and we have seen the beginning of tariffs, which could potentially lead to trade wars. The populist theme has also played out in the raft of elections across the globe, which while there have not been many huge surprises, the rise of populist share of the vote has caused some market worries.

 

Despite this, the US economy has continued to grow more quickly as the year has gone on and generated enough inflation to keep the US Federal Reserve (Fed) comfortable hiking rates. Growth in the rest of the world has moderated from the peak seen at the end of 2017 into 2018 but most regions are still probably growing above potential. During 2018, headline inflation globally has picked up, mainly from the increase in the oil price, while core inflation remains subdued.

 

What is our central economic thesis looking forward into 2019?
Our central economic thesis is our two- to three-year outlook for the global economy, we update this every month and will re-visit the thesis in times of extreme market stress. However, as we approach 2019, we summarise our views below:

 

Trade-off between cyclical factors and structural vulnerabilities

  • US momentum and Chinese policy are key to extending the current economic cycle
  • A stronger USD and trade disruption unveiling weaknesses in emerging economies
  • Becoming increasingly difficult for current policy to offset balance sheet strains

Inflation is likely to remain contained

  • Positive real wage growth could test policy makers’ resolve
  • But a lack of pricing power and debt overhang will keep inflation low versus history
  • Core bond yields ultimately capped by structurally lower nominal economic growth

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