MARKET PULSE: Why to prepare for a late stage cycle environment

Market Summary: Trade war takes a break while uncertainty around Brexit increases

Equity markets experienced a recovery in January, after a difficult end to 2018. Global equities gained over 7%, as investors put recession fears aside. Positive news of ongoing negotiations aimed at resolving the trade war between the U.S. and China, a short-term agreement to end the government shutdown, and signals from the US Federal Reserve (Fed) that it would be more patient with further rate rises supported the markets.

USD Bond investors also benefited from the Fed’s perceived pause. Crude oil prices rebounded sharply during the month, aided by tightening supply due to sanctions against Venezuela going into effect and Saudi Arabia reducing output.

Britain’s parliament has rejected the negotiated Brexit agreement with the European Union. While this has increased uncertainty, expectations are that this will lead to an extension of the deadline to make room for more negotiations. Even so, political uncertainty remains a concern, while recent macroeconomic data releases continue to send mixed signals about the outlook for the global economy.

Economic Outlook: Weakness of global growth will carry over to coming quarters

The global economy continues to expand, but third-quarter growth has disappointed in some economies. The slowdown occurred against a backdrop of weakening financial market sentiment, trade policy uncertainty, and concerns about China’s outlook. While the announcement that tariff hikes were put on hold for 90 days in the US-China trade dispute is welcome, the possibility of tensions resurfacing in the spring casts a shadow over global economic prospects.

According to the International Monetary Fund (IMF), global growth in 2018 is expected to be 3.7 percent, but signs of a slowdown in the second half of 2018 have led to downward revisions for several economies. Weakness in the second half of 2018 will carry over to coming quarters, with global growth projected to decline to 3.5 percent in 2019 before picking up slightly to 3.6 percent in 2020.

Kaiser Partner’s View: Preparations for a late stage cycle environment

We expect the year 2019 to deliver further growth but at a lower level. Fiscal and monetary policy support will stagnate or continue to fade. We do not expect the economy to falter as central banks incorporate market developments in policy settings and seem to stand ready to stabilize the market. For this reason, we do not see a recession coming in the US.

In the coming year, we presume persisted elevated volatility in equity and fixed income markets. Rates in Europe will increase with the anticipation of the activity of the European Central Bank (ECB) at the end of the year. In summary, we will continue to align our portfolio for a late stage cycle environment with increased volatility and uncertainties coming from political risks. After the latest announcement from the Fed at the end of January, we decided to increase our equity positions, which were slightly underweight, back to a neutral stance.