Strategy & economics
Monthly market update: March 19
Stock markets around the world have continued to recover. While global economic data is weakening, there are a number of reasons for cautious optimism
Weaker 2019 growth but reasons for optimism
Stock markets around the world have continued to recover over the last month. The MSCI World Index is now up close to 8% in sterling terms in 2019. The change in the near-term economic outlook has been less impressive. We recently made a small cut to our global growth forecast for 2019 to 2.8%. Activity data has been slowing, with global trade volumes falling sharply at the end of last year. However, there are a number of reasons why the outlook should stabilize. As a result, we also made a small increase to our 2020 global growth forecast to 2.7%.
Reduced political uncertainty will remove a headwind to growth
Firstly, there have been encouraging signs of progress in the US-China trade talks. President Trump recently delayed a scheduled March increase in tariffs on Chinese imports while negotiations continue. There is increasing hope that the US president and Xi Jinping will announce an agreement when they meet later this month in Florida. A deal will help support US growth in 2020 as the boost from higher fiscal spending dissipates.
Closer to home, there is an increasing probability that the UK will manage to avoid a “no-deal” Brexit. The uncertainty of the last few months has caused us to downgrade UK growth forecasts for the first half of 2019. However, assuming a deal is agreed, we envisage a rebound in business and consumer spending later in the year.
Oil and central banks lend support
The second reason for cautious optimism is the impact of lower oil prices feeding through to higher real incomes, particularly in the US where taxation on gasoline is low and consumers directly benefit from lower oil prices. In addition to higher consumption, the prospect of rising real wages should help ease the political tensions that have been so apparent over the last few years.
Finally, the soft near-term outlook means central banks around the world are likely to refrain from tightening monetary policy. We expect only one more increase in interest rates from the Fed in the current cycle. Meanwhile, we have pushed back our forecast for interest rate increases in the Eurozone and UK.
Our equity exposure has benefited from the rebound in global stock markets. However, we are neutral on equities. While valuations are reasonable, earnings growth has likely peaked. We remain underweight fixed income, but believe valuations look attractive in US inflation-linked and emerging market debt. We also like the diversifying characteristics of alternative investments.
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