We have identified two main drivers of market performance in 2019: the evolution of the growth-inflation mix, and geopolitical uncertainty. We expect slowing but still above-potential global output growth and a gradual rise in inflation, leading to moderate monetary tightening. In the light of what happened in 2018, geopolitical uncertainty is likely to shape or shake financial markets in 2019.
In 2019, we expect slower economic growth than in the previous two years, but no abrupt slowdown. In particular, we see the potential for convergence between the United States and the rest of the world, as the stimulus effect from the tax cuts is fading. More specifically, we expect the recent policy-easing measures undertaken by China to bear some fruit and mitigate the negative impacts of the slowdown and the trade war on emerging markets. In Europe, economic momentum, although disappointing and less dynamic, remains above-potential. In this context of ongoing positive growth, we prefer equities over bonds and are maintaining a cautious approach towards credit.
As the economic cycle progresses, labour markets – from the United States to Japan via the United Kingdom and Germany – are becoming increasingly tight. This should put upward pressure on wages. In addition, rising producer prices and the introduction of tariffs should lead to higher inflation rates and further yield-curve flattening. That said, we expect the rise in inflation to remain gradual and do not expect any overshooting into “inflation fear”. Hence, central banks might respond with only moderate monetary tightening. In addition, 2019 will mark both the final year of Mario Draghi’s 8-year term at the helm of the ECB and the end of quantitative easing.
Geopolitical uncertainties represent the main risk which could tip the scales from an expected soft landing towards a hard landing. The several layers of uncertainty could lead to increased market volatility in 2019. First, on a global level, the confrontation between the United States and China certainly reaches beyond trade issues. In 2018, the implementation of tariffs has impacted capital markets negatively as it ultimately impacts corporate earnings and slows down global economies via lower business confidence. Second, the European agenda will remain full of uncertainties, ranging from Brexit and unresolved Italian budget issues to stalling structural reforms in France. The European parliamentary election at the end of May will be an important milestone, as populist and Eurosceptic forces are likely to gain influence. Clearly, Europe faces a tricky year in 2019. The good news is that the sell-off experienced in 2018 has already restored an equity risk premium both in emerging markets and in the Eurozone, as valuations have come down significantly. Durable political relief could therefore translate into an equity market re-rating for those regions.