All markets are of interest and are interlinked around the key questions of economic growth, monetary policies and political uncertainty. We would highlight emerging markets in general (bonds and equities), after they underperformed last year due to a strong United States dollar and tensions on trade. Investors should find them more attractive, as they combine reasonable valuation with solid long-term prospects.
2) What industry sectors look promising and why?
As regards equity sectors, we would highlight two different strategies: For long term growth, we favour selective sub-sectors of technology (with the theme of data and security, around the disruptions from 5G, autonomous transportation and connected healthcare). For dividends, we believe in global oil and commodities sectors.
3) What is the outlook for gold in 2019?
We have a positive outlook and are overweight on gold, with an estimated fair value of $1,400 per ounce and some support from the medium-term trajectory of US real yields. Gold is also a defensive asset of choice which enhances the robustness of a multi-asset portfolio with its diversifying power, especially in risk-off episodes. After a decade of generalised quantitative easing, it is also appreciable as a “currency that cannot be printed”.
4) What is the outlook for the U.S. dollar in 2019?
As the U.S. Federal Reserve has recently adopted a more dovish tone, we don’t expect a significant appreciation for the U.S. dollar in general – this could happen later in the year should the Fed hike rates again. The U.S. dollar might, however, have peaked versus emerging market currencies as a group, which is part of our positive call on emerging assets.
5) What is the outlook for oil prices in 2019?
Our specialists expect an average oil price of $65 (per barrel) for Brent in 2019, with significant volatility.
7) What will be the main drivers of market performance in 2019?
Earnings growth should be the most important fundamental driver for equity markets performance. However, sentiment and positioning will keep on generating significant volatility throughout the year.
8) Do you expect global growth concerns to keep weighing on investor sentiment throughout 2019? Or is it a temporary problem?
At this time in the U.S. economic cycle and in the context of trade tensions, growth questions will remain an important source of concern for investors in 2019, as well as the potential responses from authorities, especially on the monetary front. We believe that emerging economies benefitting from strong domestic drivers will thus benefit from increasing attention from investors, as their growth is, by definition, more self-sufficient.
9) Do you see technology (machines, AI’s) providing investment opportunities or challenges for market participants?
Technology in general is and has always been a source of formidable investment opportunities for the long term, creating value for the entire economy in excess of the disruptions they might cause. The relation of markets with technology is, however, often turbulent, as markets tend to overestimate the short-term impact and sometimes underestimate the long-term potential. Technology is an area where investors have to be discerning, and we also believe that valuation, even for high-growth companies, should always be part of an investment decision.
10) What impact do you think the Federal Reserve’s quantitative tightening policy is likely to have on markets? Do you expect this policy to continue in 2019?
In January, the Federal Reserve not only reiterated its “patient” stance on rates, but also signaled that it may have some flexibility on its balance-sheet. We generally believe that quantitative tightening generates volatility in financial markets. The paradox is that higher volatility fuels risk aversion, which, in turn, supports the price of U.S. Government bonds through a “flight to quality”, mitigating the direct impact of the reduction in demand for U.S. Govies from the Fed.
11) China has experienced a slowdown in 2018 due to the government curtailing non-bank lending and trade tensions. How do you think it will perform in 2019, and what impact will Chinese government policies have on world markets?
We are positive on Chinese assets over the long term and their valuation also supports a positive performance in 2019, assuming there is no material escalation in the tensions with the U.S. in particular. The deceleration of China is natural and managed in an orderly manner by the government, which is aware of the risks of excessive leverage and has taken appropriate measures to address it.
However, the process has been put on hold due to trade tensions and their impact on business confidence in particular. The authorities have thus adopted stimulation measures to counter and keep control of their economic transition.
Any positive outcome of the current U.S.-China relations would provide some support to Chinese markets and allow the government to resume its efforts to limit financial risk and further institutionalise its markets.
Any opinions expressed here are the author’s own.
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