2019 Global Market Outlook: The Late-Late Cycle Show

Synopsis

U.S. Federal Reserve tightening, trade wars, China uncertainty, Italy’s budget standoff with the European Commission and Brexit imply that 2018’s volatility should continue into 2019. We believe that 2020 marks the danger zone for a U.S. recession, which gives equity markets some upside in the year ahead. However, late-cycle risks are rising—and monitoring these risks will be critical to avoid buying a dip that turns into a prolonged slide.

Key market themes

We believe 2019 will feature volatile equity markets that deliver mid-single-digit returns, with better potential in Europe and Japan than the U.S. We have an underweight preference for U.S. equities, mostly driven by expensive valuations. The market cycle is broadly neutral but is likely to be under downward pressure later in 2019. The sell-off in late 2018 has triggered some contrarian oversold signals, so there is scope for a tactical bounce. We expect the U.S. Federal Reserve (the Fed) to follow its December rate rise with three to four additional hikes in 2019, which will probably lead to an inversion of the U.S. Treasury yield curve.

In eurozone equity markets, we expect 8% growth in earnings per share in 2019, which would be a positive outcome for investors relative to what they have experienced over the past two decades. To achieve that profit increase, eurozone gross domestic product (GDP) growth needs to stay at or slightly above the long-run potential of around 1.5%, which we think is very achievable. The main risks to the benign cycle view are the budget conflict between Italy and the European Union, a disorderly Brexit and an escalation of the global trade war. Our base case is for these three risks to fade during the course of 2019.

As UK equities have effectively traded sideways over 2018, they continue to look slightly cheap on our scorecard moving forward. At 1.4%, 10-year gilts are still long-term expensive, and indeed more expensive now than this time last quarter given our higher forecast for the UK base rate.

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DISCLOSURES Opinions expressed by readers don’t necessarily represent Russell’s views. Links to external web sites may contain information ...

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