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Canada Life’s CIO 2019 outlook: slow and low

An unnerving 2018

After some remarkable ups and downs in 2018, asset prices have come back to earth and global growth is now firmly in low gear. The US Federal Reserve’s quantitative easing (QE) withdrawal with four interest rate hikes last year made an impact across the board from widening corporate bonds to battered emerging market currencies and we expect this and the reaction to other central banks’ tightening to provide a headwind for the wider markets in Q1 of 2019. Several bubble bursts have also already happened; for example, the collapse of Bitcoin and US tech stocks, which (as we have seen before in other ballooning asset classes) coincided with market peaks.

Slowing but not contracting

Although unemployment and inflation rates remain low, economic forecasts for 2019 are reasonably weak and December 2018 saw some sharp falls in Purchasing Managers’ Index (PMI) data, particularly in ‘new orders’. According to IHS Markit, European manufacturers reported their worst quarterly performance in terms of production since the second quarter of 2013. Market prices continue to reflect this slowdown. However, moving into 2019 we feel moderately positive about buying opportunities in selective equities.

In the UK, growth remains subdued thanks to Brexit uncertainty and the potentially disruptive outcomes. UK assets have generally underperformed other world markets and are already reflecting a lot of negative news. The pound also remains unloved and the FTSE 100 is currently trading at a forward P/E of just 11.5. Almost any Brexit agreement to help define a transition for businesses would be positive news for the UK market.

The European economy is also showing more signs of a softening and currently growing at its slowest pace in four years. We still expect it to grow around 1.5% this year similar to the UK. The PMI drops in December stem in part from the ‘yellow vests’ protests in France as well as the notable decline in exports that has hit Germany due to the ongoing trade war between the US and China.

In the US, growth is set to ease off following the tax cut induced growth of 2018 and the impact of higher interest rates.  Given the markets’ reactions to the Fed’s tightening moves along with anticipated slowdown in growth, we anticipate one or two interest rate rises this year instead of the previously expected three or four. Central banks are right to unwind their balance sheets and normalise interest rates and monetary policies, but there is no quick-fix and we need to accept that this will come with volatility. Whether it is corporate, individual or sovereign, debt remains a significant concern in the coming years and with all of these risks diversification remains a crucial part of our strategies.  

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