Investment Update Dezember 2018

Cloudy with a chance of sunshine

For stock markets, 2018 turned out to be a disappointing year. Whereas economic fundamentals were largely encouraging, political tensions in various corners of the world caused investors to lose their appetite for risk. In recent weeks, fears of a global economic slowdown and signalling by central banks that they will further tighten monetary policy have taken even more of the shine off risky assets.

The world's leading central bankers presented a united front on monetary policy alongside very cautious growth and inflation forecasts.

The world's leading central bankers presented a united front on monetary policy alongside very cautious growth and inflation forecasts. This caution was buttressed by a number of economic indicators that were less encouraging. Most indicators increasingly confirm the downturn predicted by a majority of institutional analysts. Both services and manufacturing appear to be in decline

So 2019 looks set to be overcast, but will it be a stormy year? Not necessarily. After all, let's not forget that every cloud has a silver lining. Several events in the last few weeks of 2018 give reason to hope that the risks weighing down the markets may fade away. Faced with a slowing economy, China is increasingly softening its stance in its trade war with the United States.

For example, it suspended higher tariffs on American cars and increased its purchases of US soy beans. It even appears willing to tone down the strategic ambitions laid out in its Made in China 2025 plan. These reassuring steps illustrate China's conciliatory approach in trying to end the conflict. Conciliation has also been a central theme in Europe. In one encouraging development, the EU Commission and Italy came to an agreement over the latter's 2019 budget.

Growth prospects may be less bright, with an orderly global slowdown on the horizon, but there are more than a few shafts of sunlight piercing through the clouds. Official forecasts from various central banks state that while growth is down, it is far from at a halt, and the risk of a global recession remains low. The US economy is set to expand at a lower but still healthy rate of 2,3% (down from 3%), according to the US Fed, and growth in the eurozone is expected to stabilize, according to the ECB. Add to this the strong likelihood that fiscal policy will be kept relatively loose over the short term in the biggest eurozone economies. The recent public spending measures announced in France and the minimum wage increase in Spain are two examples of this. We may therefore be in for slightly sunnier skies over the next few months.

However choppy the waters may be in the coming months, overall conditions will remain viable for investors.

Various political risks and fears of an economic downturn will probably continue to fuel market volatility. Yet however choppy the waters may be in the coming months, overall conditions will remain viable for investors. As risks gradually ebb away, the markets may well rebound in the beginning of the year. And while the global economy is easing up, it is not winding down. All in all, until the skyline clears, we remain cautious in the short term and are staying neutral on equities.


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