Market update - December 2018

A summary of our current economic and market views


Volatility persists

The turbulence that gripped global equity markets in October continued into November. By the end of the month many major indices, including the S&P500, were only marginally higher than at the start of the year. Anxiety continues to focus on the weakening global economy, along with political uncertainties including Brexit in the UK and anti-Macron protests in France. There has been some respite in the form of a short-term trade truce between the US and China. However, we remain sceptical on the prospects for a longer-term agreement on issues such as intellectual property rights and expect a resumption of hostilities next year. The UK Parliament votes in the coming days on whether to accept the Brexit deal negotiated with the EU, and this key stage in the process is likely to be a source of further volatility for sterling and UK assets.

Signs that growth has peaked?

Major economies continue to grow but momentum is fading. We expect the global economy to post 3.3% growth this year, slowing to 2.9% in 2019 and 2.5% in 2020. The longer-term effects of any trade war between US and China, coupled with an end to the fiscal boost provided by President Trump’s 2017 Tax Cuts and Jobs Act, is likely to hamper growth in the world’s largest economies. While Mr Trump might wish to implement further stimulus, it may be more difficult to do so following the mid-terms in which the Democrats took control of the House of Representatives.

An end in sight to US rate rises

A slowdown in growth is likely to lead the US Federal Reserve to pause its cycle of rate increases in mid-2019. Comments in a speech by Federal Reserve chairman at the end of November were perceived by the market as an indication of a softened stance, and equities rallied as a result. President Trump has criticised the Fed’s rate-setting policy, claiming it poses “a much bigger problem than China”. An end to US rate increases is likely to weaken the dollar which in turn is favourable to emerging market assets, which have suffered during 2018.

Portfolio implications

The likelihood of continuing volatility means we continue to favour diversification, both within equity markets and between asset classes. Continued earnings growth and improved valuations mean that we are comfortable retaining our current exposure to equities. Diversifying assets such as property, infrastructure and absolute return strategies are used in portfolios where appropriate and we prefer cash over bonds in a rising rate environment, and to provide liquidity should volatility provide opportunities for reinvestment.



The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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