Global growth should peak in 2018, according to the International Monetary Fund (IMF). We do not expect recession is imminent, however some factors supportive of strong economic growth could slowly fade. The US fiscal stimulus that helped push growth to around 3 per cent in 2018 will cycle in early 2019, reducing growth to about 2.5pc.
Meanwhile, rising interest rates in the US, which we expect will continue in 2019, should also gradually lower corporate spending, given companies’ reliance on leverage. As excess capacity gets soaked up, US economic growth would depend on greater productivity, which is more difficult to achieve.
In China, the latest switch in policy priorities, from deleveraging to targeted stimulus, should lead to a rebound in fiscal spending on infrastructure which should continue to underpin commodity prices. However, it is less clear whether corporate investment will accelerate as well. Additional pressure on the Chinese yuan (CNY), from the narrowing interest rate differential between the US dollar (USD) and CNY, could also limit the extent of monetary easing in China.
Consumption should remain resilient, Chinese consumers are still embracing a broad range of services such as education, healthcare, financial services and tourism. We expect growth in 2019 will not deviate significantly from 2018’s official target of 6.5pc.
Domestically, the economy continues to track slightly above trend with GDP growing at 3.3pc for Q3 2018. Surveys of business conditions remain above average and job creation continues at strong pace averaging 21,000 new positions per month in 2018. We expect the RBA to keep rates on hold well past 2019 as inflationary pressures remain at bay. However, falling house prices and tightening liquidity will undoubtedly crimp growth in 2019. Moreover, political uncertainty may cause businesses and households to hold back investment decisions.
Risks to watch for in 2019
Trade war, geopolitics and technicals geopolitics remains at the top of the list of concerns that could upset the global economy in 2019. The ongoing US-China trade dispute could persist. However, instead of an unrelenting conflict we expect Beijing and Washington to go through intermittent rounds of threats over tariffs and export restrictions.
The potential for further damage to their economies should help deter the countries from taking their threats too far. Political developments in Europe and the UK could continue to challenge that region’s unity. While we do not expect any member of the eurozone to leave the bloc, tensions could spark financial stress for countries on the periphery, such as Italy.
Investor sentiment could also turn more skittish as market participants shift their focus to growth and inflation data.
2018 can be seen as a period in which the investor mood beat fundamentals, with equity valuations suffering significant de-rating even as earnings remained respectable. Investors may also turn their attention to more technical factors, such as market liquidity and limit small cap exposure in times of stress.
Building a resilient portfolio
Overall we think the weakness at the tail end of 2018 will prove to be another ‘reality check’ for a market that had run a little ahead of itself, rather than a precursor to something more serious. Market corrections are healthy and normal. The increased volatility in the market as a result of rising macro uncertainty and tighter financial conditions argues for a greater focus on portfolio resilience. We prefer exposures that provide exposure to above average growth prospects, experienced management teams and healthy balance sheets.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410