Please note: this article is more than one year old. The views of our CIO team may have changed since it was published, and the data on which it was based may have been revised.

Trade conflict fears have disrupted trade chains and put a dent in global economic prospects. In response, central banks have stepped in. The Fed has said that it will “act as appropriate” and the ECB has said that, without improvement, “additional stimulus will be required”.


For the moment, this is just a statement. The global economy has yet to slow further and central banks haven’t yet cut rates. But the central banks’ commitment is an important one. Financial markets believe that policymakers’ promises will be honoured and that monetary policy intervention will blunt the market impact of slower growth.


Such central bank promises create some risks. Even though inflation remains stubbornly low, and below target, most economic data do not yet provide a good reason to cut rates shortly. But if central banks do not cut rates, their authority could start to be undermined because they have raised expectations about lower rates to the point where it would be awkward to backtrack. This may provide an incentive to cut rates more than would normally be the case – good news for markets in the short term, but not necessarily in the long term.


There is also a non-optimal solution in that central bank action is partly being used to counter the effects of an escalation in the trade dispute and the resulting shifted patterns in trade flows – thereby quite possibly prolonging trade friction longer than it might have lasted. Which direction the trade dispute goes and whether there will be new tariffs remains unclear. What we know is that the effects of a trade conflict are long-term and predictably negative; the effects of monetary easing are perhaps short-term and not predictable. 


This situation has a direct bearing on our six themes for 2019, which we discuss below. 

Six themes update
Theme 1: Economy

Growth deceleration

Central banks have made it clear that financial markets can count on their support. However, markets may have got ahead of themselves. We don't expect the Fed to deliver as many cuts as are currently priced in. And once central banks are expected to step in, markets may become complacent about risks.

Theme 2: Capital markets

Vigilant on volatility

Q2 data are likely to reveal an ongoing economic slowdown. Therefore, financial markets may become more jittery, reacting badly to negative news. Beware of cash positions: they carry their own risks in a higher volatility environment.

Theme 3: Fixed income

U.S. yields on the return

Anticipation of policy loosening has depressed yields to all-time lows. Safe-haven flows have contributed to low yields. Investment grade and emerging market hard currency debt are still appealing.

Theme 4: Equities

Earnings ease

We expect lower earnings growth in 2019. The collapse in bond yields could support flows into high-quality dividend stocks. Defensive equity sectors offer growth potential in this stage of the cycle.

Theme 5: FX & commodities

U.S. dollar and oil centre-stage

We expect the U.S. dollar to keep its value in the second half of the year. The yen could gain from safe-haven flows, like the Swiss franc. Oil supply has become much more elastic, smoothing out price swings.

Theme 6

Long-term investment – Tech transition

Developed countries are in need of infrastructure investment just as much as developing ones. A hidden but substantial part of infrastructure spending goes towards technology. Regulation in the ESG space represents challenges as well as opportunities.


The report “Cracked, but still intact – How long will markets defy the economic slowdown?” includes our current macroeconomic forecasts for 2019 and 2020, as well as our 12-month market forecasts. 


To download a print-ready pdf of the full report, please click here.


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