2018 has been a difficult year for investors to say the least. The long bull markets in both equities and fixed income have encountered strong headwinds, and international stocks have underperformed following a very strong 2017.
Shifting fundamentals in an aging expansion have certainly played their part in slowing investment returns, as the US Federal Reserve has gradually tightened US monetary policy, a new populist government in Italy has revived eurozone fears and Middle East turmoil has led to more volatile oil prices.
However, the single most important issue moving global markets in 2018 was rising trade tensions, and this will likely also be the case in 2019. In a benign scenario, the US and China come to an agreement on trade issues, potentially allowing the dollar to fall and emerging market stocks to rebound following a very rocky 2018. In an alternative scenario, an escalating trade war could slow both the US and global economies with negative implications for global stocks.
2019
We believe 2019 offers some important advantages relative to 2018. The pullback in markets came on surprise news and not weakening fundamentals. Valuations look more attractive after a challenging year for assets.
We headed into 2018 with global growth was strong and synchronized while market volatility and long-term bond yields were still low. However, the opposite happened during the year. At these levels the sell-off in 2018 was an over-reaction to the downside relative to the still growing (but slowing) global economy.
We expect these challenges will create fears about the end of the economic cycle and peak in corporate earnings but we believe there concerns are premature.
The temptation to take down risk will rise as the cycle ages, but the signs of deterioration required to do so are absent.
Corporate earnings are likely to grow in 2019 not contract. More importantly, we so not expect to see excessive central bank tightening or systematic financial imbalances in 2019 that would warrant end-cycle fears.
Conclusion
We think investors will face more signs in 2019 that the long cycle is becoming stretched after a challenging 2018. These challenges have been accompanies by a significant shift in valuations. We think sentiment is overdone, lowering the bar for positive surprises.
Disclaimer:
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.