Is another unpredictable year ahead?

After a torrid 2018, what lies in store for markets in the year ahead?

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  1. Garry White

There is a lot of nervousness in markets following sharp falls at the end of 2018. How will equities perform in a challenging environment marked by political tensions and rising interest rates? Predicting the future can be extremely difficult. Numerous forces are acting simultaneously and their interactions are so complex that extremely small variations in the power of these forces – or the way they interact – can result in large differences in outcomes.

However, after recent market falls there are some reasons to feel cheerful that markets could regain some poise as the year progresses. The most important drivers are likely to be seen in the US. The main downside scenario for risk assets is that economic growth slows but rising inflation forces to Federal Reserve to continue hiking. But the fall in the oil price over the last few months has been helpful on this front. US President Donald Trump’s public attacks on Jerome Powell, chairman of the Federal Reserve, have been particularly unhelpful.

The US President watches markets with a very keen eye – seeing them as a proxy for his own success in the Oval Office. That’s why he has targeted what he regarded as the hawkish Chairman. It’s important that there is at least an appearance that monetary policy is free from political interference, so President Trump’s social media attacks could have been counterproductive. However, the central bank appears to have become more dovish following the attacks and interest rate rises will now be “data dependent”. This is good news.

The next issue the US needs to resolve is its trade war with China. Although President Trump has taken great pride in calling himself “Tariff Man” and taken relish in his strongman posturing, the war had a major impact on global markets. Taking this difficult and fractious issue off the table, would be a big win for emerging market equities, particularly China, but also the US. Apple’ sales warning at the start of the year was caused by a slowdown in handset sales in China. Should President Xi Jinping and President Trump manage to come to some agreement it is likely to give markets a major boost. It is in both leaders’ interests to prevent further economic damage at such an important time. Indeed, Chinese consumers appear to be starting to boycott American goods, which could be negative for US business should a substantial amount of China’s 1.4 billion people take umbrage at the way the Trump administration is treating their country.

GDP growth in major economies is also expected to be strong. The current consensus is for US expansion of 2.6%, down from more than 3% in 2018, GDP growth of 1.6% in the Eurozone and 1.5% in
the UK – although a disorderly Brexit may hit the latter figure. Unemployment globally continues to fall, and solid corporate earnings growth will continue, albeit at a lower level than in 2018 as the effect of Donald Trump’s tax giveaway wanes.

So, we expect to see continued growth and hopes are increasing that we will not see tighter US monetary policy and a further escalation in trade tensions in an environment where US growth is easing. However, it is likely there will be a continued focus on exactly when the cycle will end, ensuring there is volatility in equity markets. Equities remains our preferred asset class, given relative value compared to bonds. We expect to see reasonable returns in global equities this year but this is unlikely to exceed single digit growth.

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