2019: Economic slow-down with the absence of a proper crisis

Financial markets will face numerous challenges in 2019. The later stages of the economic cycle bring with them more sensitive reactions by market participants and therefore also an increased level of volatility. This was indicated by the development and valuation of assets last year, as it was rather difficult to find a true investor’s ‘promised land’. However, financial markets entered the new year with a clean slate, which – together with favourable economic conditions – offers a convenient opportunity for a rebound.

Good times are gone, though we should not anticipate a tragedy

This year will bring a slow-down in growth dynamics to the global economy, particularly as a result of the downturn in the three largest global markets. The outlook in the USA will be influenced by the dissipating impact of the fiscal stimulus in the form of the Donald Trump’s tax reform, the higher rates set by Fed leading to excessive costs for loans as well as a strong dollar making US exports to foreign markets disadvantageous. Europe is going to face a downturn in exports, which will be overtaken by strong domestic demand and a rather tight labour market. China will slow down under the impact of lower stimuli, efforts to transform the economy along the lines of the demand-based Western model and as a result of attempts to curb shadow banking. Still, the global economy as a whole should continue growing despite these stumbling blocks, reaching above-trend levels close to 3.5 % of GDP. It will be driven particularly by developing markets, whose share of the total global economic pie has been getting larger.

The Fed switching to autopilot

Inflation pressures will be limited by the declining dynamics of economic growth. This will cause a more moderate approach of central banks when raising interest rates. Several representatives of the Fed have already expressed their patience in setting up monetary policy. At the moment, markets are rather sceptical about the dollar rates’ increase. Dollar rates are not expected to increase – at least not in the first six months. Balance sheet amounts of the key central banks will be reduced. The Fed discontinued the quantitative easing programme a while ago, and towards the end of the year it was joined by the ECB. The decision of the Bank of England on this matter is anticipated soon, as the BoE has been hesitant due to the unclear situation related to Brexit. So far, the Central Bank of Japan is not likely to refrain from stimuli in the bond market. Although the current year is expected to bring a reduction in liquidity due to increasingly tougher monetary conditions, in the long term the situation will remain favourable in this respect.

Unaddressed political challenges

We are not likely to encounter any new political shocks. During the year, we will probably witness efforts to settle disputes carrying over from 2018. Renewed negotiations between the US and China in the sphere of setting for rules in international trade have laid the foundations for future dispute resolution. However, we are not likely to see a broader consensus in such a complex topic anytime soon. Year 2019 will be a key one for Europe. Elections to the European Parliament will become a major test of the continent’s future direction. Budgetary issues, whether in Italy or France, may sooner or later make their way back to the negotiating table. The political elite will have to mobilise before it’s too late. For the United Kingdom, the key task will be to tackle the continuing drama about the form of Brexit.

Nervousness replaced by optimism

Financial markets are gradually resigning on the extreme pessimism of the last year. For American stocks, December 2018 was in fact the worst December since the Great Depression. This could be explained by the long preceding period of economic growth and the longest bull market for US stocks in history, which lasted practically for 10 years. Stock markets started to recognise the arrival of trouble; however, this turned out to be premature. It showed again that market timing is an extremely demanding discipline. Although the economic cycle is in its last stage, considering the level of investments, consumption and the labour market, it is most likely not over just yet.

In the long-term horizon, the stock market is on the rise. Seasoned investors, therefore, will take advantage of the price drop to make cheaper acquisitions. The current quantification of stock markets using the Forward P/E (anticipated price to earnings ratio) is deeply below the long-term average after the correction from the last year. American stocks are at their cheapest in the most recent two years, while Europe and developing markets are even more attractive in this respect. A storm is typically followed by sunny weather. This, at least, can be seen from January developments so far, as we are witnessing a gradual sobering after the wild ride of the last year, and we now clearly see that throwing in the towel in the stock market ring was not a prudent decision: Stock markets are now enjoying the best beginning of the year in the most recent decade.

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