In this year’s outlook, we share our views on a number of macro themes which we think will be highly relevant in 2019 and their likely cross-asset implications.

We see 2019, as a ‘No Recession Yet Tricky year’ as long-standing cross-asset relationships come under pressure. The no recession part means that, on its own, risky assets should remain supported. But the tricky part comes by the fact that we expect volatility to remain higher, and several episodes of correction to take place. That has implications on how we build up portfolios and how we access risky asset risk premia in the next 12 months and beyond.

We expect decoupling amongst economies, policies and market outcomes to become significantly more dynamic and volatile compared to the years following the financial crisis. We also expect trend or above trend growth in a number of major and key emerging countries next year and see the likelihood of a global recession as very low. That said, we expect that an “equilibrium” state, whereby global policy and the economy will appear in sync, is likely to remain elusive in 2019 as well.

Below is a summary of the key factors we expect will shape the global economy in 2019: 

• We expect US economic outperformance to reverse, US assets to underperform and the dollar to come under pressure as late cycle dynamics take hold, the effects of tax cuts and repatriated profits begin to wane, the split Congress reduces the potential for further tax breaks, and the Federal Reserve becomes more measured in its approach.

• We believe emerging markets are poised for a rebound as trade tensions between the US and China ease and the Chinese government’s efforts to stabilise its currency and equity market work through the system. Contrary to consensus, we think the ongoing stimulus efforts may lead to a positive growth surprise for China.
• In Europe, we expect the Italians will back down from their game of chicken with the Eurozone, but only in response to extreme market pressures, which means the road to Italy’s breaking point is likely to be volatile. Meanwhile, we expect Brexit will result in a ‘cliff-edge’, last-minute deal, potentially creating a rally in Sterling, which currently looks cheap.
• Global inflation overshoot remains a key risk to our central scenario as global monetary policy shifts into unified tightening mode. At the more structural level, we also expect the global economy to come under pressure from two key areas:
• Rising populism, driven by increasing inequality, could mark the peak in central bank independence
• Rising global leverage implies lower resilience to shocks from rising rates or falling incomes

investment implications

• A structural allocation to emerging markets using a multi-asset approach
• Downside protection, and a deeper focus on convexity
• A focus on quality in fixed income
• The relevance of uncorrelated strategies is likely to increase
• Sustainability factors will continue to drive risk and opportunity in 2019

Download the Global Outlook 2019.