Following a torrid 2018, one of the worst years in a decade, investors might have been reluctant to retain their positions in 2019. It is 2018 that instigated fear and pushed investors to hold-on to their cash levels in the first quarter of 2019, despite the fact that to date markets have surprised many. That said we are of the view that there are four things that could go right in 2019.
The more dovish Fed and ECB
Both major central banks have recently changed their tone amid the fear of lower global growth. It is a fact that the Fed has changed its regime from a forward-looking inflation constraint to a variation regime in which it will accept inflation to be at 2 percent levels with a plus or minus band. Clearly, the said move in terms of inflation targets are coherent given the soft data for inflation in the first two months of the year.
Given that this time round the Fed is more credible, as opposed to the moves in December 2018, in terms of its more dovish stance, we see this as a positive for risky assets. Indeed, a period of rate hike stability will likely benefit markets over the medium term.
In this regard, going forward, it is a waiting game of how the Fed will react to a possible positive trend of data. Will it retain its current dovish stance or will it consider a twist in its current policy regime instantly? This time round let’s hope for a more credible Fed to reassure markets of having more depth in terms of economic visibility and not act irrationally as it did in December 2018.
The mending of trade tensions
As I opined in previous writings, our base case scenario is a trade-war solution. Trump’s motives are undoubtedly rational given the discrepancies in the current tariffs. That said his attitude is more of a barking dog trying to hold back intruders. Case in point was the NAFTA agreement which was renegotiated with more rumble rather than that the actual revisions. Yes, it’s true that he is pressuring China, but he is more than aware that his pressures do have limits and do have consequences. These pressures have led to economic disruptions and to downward revisions in global growth.
Overall, we believe that none of the parties will pursue further escalations in negotiations and thus we believe that both parties involved will meet halfway and ultimately a deal would be struck. This will surely be a positive for markets, which should react positively to the news.
The stabilization of growth in China
The economic slowdown in China has increased pressures on both the Government and monetary politicians to act rapidly. Indeed, fiscal stimulus was eased while the Bank of China also continued its easing policy by for instance lowering its reserve ration requirement for banks. In addition, the Government pledged more stimulus with more tax cuts in 2019, while infrastructure investment should also continue to increase.
Thus through the coordination of fiscal and monetary policies we should see a stabilisation in economic growth in China which in turn should trigger also a positive vibe to markets given its important contribution to global growth.
A recession-not on the horizon
In the last quarter of 2018 many commentators propagandised the possibility of a recession at the end of 2019. This led to a wave of volatility, which also pressured major central banks in revising outlooks and twist to a more dovish stance.
In reality, looking at data in the first quarter of 2019, there seems to be no signs of recession. On the contrary, employment figures are still robust, while manufacturing data figures, which have dipped in the fourth quarter of 2018, amid trade tensions, have rebounded in 2019. Thus given a good pace in data points we should continue to see confidence in financial markets.
Generally, we believe that the second quarter of 2019 should follow its preceding quarter, while a maintained dovish stance by central banks, given the possibility of further data strengths, we should also be more constructive for the third quarter of 2019.
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