Relief over the temporary US-China trade proved short lived as anxieties about tightening monetary policies, slowing global growth and geopolitical uncertainty took hold in December. The sell-off was deep and broad, probably exacerbated by the thin trading volumes across the holiday period. The worst Christmas eve for US markets on record was followed by a record single-day point gain for the Dow on Boxing Day. A number of markets entered bear market territory.
As we enter 2019 risks are probably higher than they have been at any point since the eurozone crisis. However, a number of issues could be resolved early in 2019 that could potentially help the global economy, including a potential trade deal between the US and China, a slowing of the pace of interest rate rises and the avoidance of a no-deal Brexit. While volatility is painful, we know that eventually it creates opportunities.
Moving into 2019 we note…..
- Global growth remains at a healthy 3.5%.
- Monetary policy is not tight and there is no sign of it becoming so. With core inflation subdued across the developed world, central banks have scope to adjust projected policy course to absorb any negative growth shocks and China may deliver a stimulus.
- Trade deals between the US and Europe / Japan are likely to follow those with Mexico and Canada and we expect trade tensions between the US and China de-escalate.
- Companies in the US are still adapting to lower tax rates and US consumers will receive larger than expected tax refunds.
- Lower oil prices should support equities in Europe as well as India (which imports over 4/5ths of their oil consumption) our favoured Emerging Market position.
- UK equities are under-owned and currency derivative positioning reflects significant concern around a hard Brexit. A more market-friendly outcome should give rise to a sharp rebound in UK assets.
- Emerging market currencies and equity markets are cheap and now gaining price momentum.
- None of the political concerns seen in Italy, Turkey , Argentina, Brazil and elsewhere look set to derail markets any time soon.
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