It has been a bumpy year for global capital markets; many events occurred that have left investors hanging onto their last breath but now, 2018 is coming to an end. What is in store for 2019?
United States
The re-election campaign in the US will be occurring in 2020 and without a doubt, President Trump will be focused on getting himself re-elected. Trump has already tried voicing his opinion with the Fed but to no avail because the fourth interest hike occurred. Trump’s strategy includes pushing for more fiscal spending, lower taxes, and new infrastructure projects but on the other hand, the Fed is currently guiding the US economy’s late-cycle turn.
Until now, Trump’s stimulus package has had the upper-hand - the booming economy reduced the unemployment rate to 3.7% in late October – a 48-year low. That being said, overall inflation is likely to be higher as tight labour markets push up wage inflation. This makes continued rate rises all the more likely, and the more cyclical parts of the US economy – like autos and housing – could react negatively. Moreover, continued trade tensions between the US and other countries could hurt all parties involved (we have already seen this evidently particularly with an economic power horse such as China).
It is expected that the US economy cools back down to a 2% growth rate. A divided Congress may find common ground to recondition healthcare costs, increase infrastructure spending and limit Chinese access to US technology. Yet, it will likely not pass additional tax-reform measures that would boost fiscal stimulus but instead, further raise the deficit.
United Kingdom
It is a year of reckoning for the UK, as 29 March 2019 marks its official exit from the European Union. How much of an exit deal is agreed by that point – and what decisions are side-lined – remains to be seen, but the country is likely to see further economic weakness if Brexit uncertainties drag on - delays cause political instability and economic chaos.
In the event of a “no-deal” outcome, the British pound and bond yields are likely to be hammered. UK assets in general are currently unloved and under-owned. How they perform in 2019 will depend as much on the end of the economic cycle as it will on Brexit uncertainty. Large, diversified exporters with significant non-EU business may be best-positioned.
Europe
While the region is currently doing fairly well, there are fault lines that seem to be affecting the European Market.
There are signs of export weakness that are hampering the German economic machine. A weakened German chancellor Angela Merkel, who has announced her political departure in 2021, may spell more trouble for Europe’s largest economy.
Apart from that, tensions in Italy – and the showdown with the EU over its budget plans – may well prevent the EU from making much-needed reforms on the capital markets union, deposit union and common fiscal policies.
The May 2019 European Parliamentary elections will be an existential moment for the continent – a struggle between Eurosceptic populists and more mainstream, established candidates.
Where the EU goes from here will become a pressing topic, as it has yet to strengthen sufficiently the essential foundations that were shaken in the euro-zone crisis. The EU remains sensitive to the growth momentum in the global economy, since exports underpin much of the region’s activity and investment.
China
China is committed to rebalancing its economy, emphasizing consumption and services over exports. The country also wants to reduce itself off high levels of debt – and encourage state-owned enterprises to maximize profits over employment. With these challenges, China certainly could do away with a trade and tech war with the US.
Nevertheless, China’s government can accomplish its goals in many ways. Its clear policies, determination and strong centralized leadership should help the country meet its economic targets. Large Chinese tech firms may be more willing to align themselves with their own government than their US counterparts. In due course, China needs to avoid the low-income trap that has afflicted many emerging markets.
Asia Pacific
Japan and the rest of Asia are linked to China’s fortunes, particularly as the US influence in the region declines. China’s series of strategic investments are an important source of funding for major infrastructure projects throughout the region.
Reform is another important theme – particularly in India and Indonesia, both of which will hold elections in 2019. Across the region, governments will strive for further economic liberalization and structural reforms to underpin their growth. Those that succeed should find their efforts boosted by a young, hard-working visionary population.
Disclaimer:
This article was issued by Maria Fenech, investment manager support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are 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.