Q2 2019 Outlook & Review

Economic Outlook

The global economy may slow further in early 2019, given lingering trade uncertainty, a continued slowdown in China, and the lagged impact of tighter financial conditions in late 2018.
However, global growth is likely to bottom later this year due to easing of financial conditions as Central Banks around the globe have turned dovish.
The Federal Reserve has put rate hikes on hold, and the fed funds futures curve is suggesting a high probability of a rate cut by year end. The European Central Bank has launched a new round of liquidity measures for banks and intends to leave rates unchanged for longer. China is stimulating its economy, and many EM Central Banks are following suit.
The US economy, while not immune to a global growth slowdown, is decelerating mostly due to fading fiscal stimulus and the effects of the previous interest rate hikes. However, its growth is resilient compared to other regions, thanks to a strong labor market and rising wages which lift consumer spending. The recent inversion of the yield curve, however, raises risks for a downturn in 2020.
The Eurozone economy remains anemic, with Italy and Germany in or near recession.
Further, geopolitical risks remain, especially Brexit and the US/ China trade standoff. Yet, a “hard Brexit” seems unlikely, and US/China Trade talks appear headed towards an agreement of some kind.

The past two quarters have seen a dramatic mood swing in risky assets. Slowing global growth, Fed hawkishness, continued trade tension between the US and China and a US government shutdown led to sharp market declines in Q4.
Markets then rebounded sharply in Q1 coincident with an abrupt dovish pivot by the Fed and progress on US/China trade relations.
While investors’ sentiment has clearly turned, concerns about global growth remain a risk. The drop in business confidence in Europe & China and Brexit uncertainties highlight risks for markets.
Stocks may need to pull back or consolidate after such a strong start to the year, but we think the general trend should be up near term, underpinned by central bank dovishness, and reasonably attractive valuations.
Our top equity allocation remains the US market, but we have also become positive on emerging markets, which could benefit from dovish central bank policies, a stable dollar, lower oil prices, a resolution of the trade disputes, and an eventual rebound of the Chinese economy.
In fixed income, we have also added risk modestly, shifting to higher yielding assets such as US high yield bonds and emerging market hard currency debt.

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