Earlier this week, we held our quarterly CIO Day forecasting meeting. We stay positive but prudent: continued global growth will help generate investment opportunities, but against an often volatile market backdrop.
1. U.S. growth looks buoyant, but expect some slowdown here and in Europe in 2019. Chinese growth will fall back too.
We have upgraded our 2018 U.S. GDP growth forecast from 2.7% to 2.9%: the economy is continuing to be supported by fiscal stimulus, high levels of employment, and buoyant business and consumer confidence. The outlook for the Eurozone is less upbeat, with a downgrade to expected 2018 growth (from 2.2% to 2.0%, see page 3), with a range of indicators still suggesting weak underlying momentum. Growth in both the U.S. and the Eurozone is expected to ease in 2019, to 2.4% and 1.9% respectively. In China, consumption should help keep GDP growth at 6.5% for 2018 as a whole, before the lagged effects of deleveraging measures force a notable slowdown in growth to 6.0% in 2019. Growth in a number of other major emerging markets should prove resilient, however.
2. U.S. equities continue to appeal, with modest gains likely in other markets too. U.S. yields will rise, as the Fed tightens policy further.
Our new asset class forecasts are summarized on page 10. We see potential for further gains in U.S. equities (end-September 2019 forecast: 3,000) and this remains an appealing market. Small gains are likely in most other equity markets, but will all expected to experience high levels of volatility as part of this late-cycle environment. Within emerging market equities, we continue to prefer Asia over Latin America. We expect 10-year U.S. Treasury yields to rise to 3.25% at end-September 2019, with Bund yields climbing to 0.80% – although these could be suppressed by increased "safe haven" demand, as we discuss on page 4. This will happen against a policy background of the Fed hiking rates at its September 2018 meeting, and then three more times over the next twelve months (page 2). The ECB is expected to end QE purchases in December 2018, as promised, but a rate rise is not likely until autumn 2019.
3. Emerging markets face a difficult few months, but will pull through. Italy and Brexitremain major Eurozone risks.
There are many risks to this scenario. Emerging markets could remain choppy for the next few months, but we remain positive over the longer term. Slower USD appreciation (EUR/USD of 1.15 at end-September 2019) and progress on resolving U.S./China trade tensions will help. Within Europe, key problems remain the Italian budget deficit and Brexit. Even a small expansion in the Italian budget deficit could make levels of government debt unsustainable and, as the Salzburg summit demonstrated this week, fundamental Brexitdifficulties are still far from resolved. With markets likely to be intermittently volatile, our advice remains to stay invested, but hedge.
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