In December 2018, we produced ‘Outlook 2019’ which attempted to outline the key themes we would be monitoring throughout 2019. We will attempt to do a recap of how these have played out over the last 6 months and if there is still merit in monitoring these over the upcoming 6 months.
The four themes we identified were:
- US interest rate path
- Implications of US-Sino trade negotiations
- European economic situation
- Emerging market performance
US interest rate path
We noted that the dot pot had indicated 3-4 increases to the Federal Funds Rate in 2019, bringing the rate up to the range of 3.00%-3.25%. Since publishing our article, Federal Reserve policy makers have reduced their expectations for interest rates in 2019 from 3.125% to 2.375%, and from 3.375% to 2.625% in 2020. This downgrade of expectations has benefited the Funds positions in US treasuries over the last 5 months. We also note that expectations for 2020 is a further rate increase. Like December, we view this estimate as too aggressive and expect it to be guided down in due course (possibly to the range of 1.75-2.00%). Should this occur, US treasuries will continue to be a core position for the Fund.
Implications of US-Sino trade negotiations
The largest theme of 2018 was the implications of US-Sino trade negotiations on global economic growth. In December, we stated that we do expect a deal to be agreed upon and we still hold this view. Markets have rallied this year on the hope the US and China will reach a deal, however recent communication from both parties shows they may still be a fair way away. The posturing and back and forth will continue to impact global economic growth as it has over the last 12 months, however looking forward unless we see an aggressive response by global central banks to stimulate their respective economies, we view a continued global slow down as inevitable.
European economic situation
There were very few positives seen in Europe in December, and the current case is still the same. Purchasing Managers Indexes (PMI) have shown continued contraction, Germany reported a reading of 44.50 (above 50 is expansionary, below contractionary), with most other European nations have shown similar declines. On the other hand, we have started to see some very small green shoots in Europe, which may provide some solace that the bottom may be in, or getting close to being in. German Industrial output for March registered 0.5%, which beat expectations of -0.5%. Italian Markit PMI for April was 49.1 vs the prior reading of 47.4 in March. United Kingdom (UK) Manufacturing output rose to 0.9% from -0.5% in December. Our view on Europe remains the same, the European Central Bank (ECB) has a very difficult task of continuing to provide support to their economy however at the same time be sensible with their monetary policy, to ensure they have something left up their sleeve if their economic situation deteriorates further.
Emerging market performance
In December, we noted the impact of a strong United States Dollar (USD) on emerging market (EM) economies and reasoned that when/if a rate cut in the US occurs, the USD would depreciate and provide respite for EM debt levels. Contrary to our view, the USD appreciated over the last 6 months. This has occurred due to other global central banks talking down their rate hike plans for the next two years, in combination with deteriorating global economic data. After seeing this change in rhetoric from global central banks earlier this year, our view on the USD has now changed to bullish in the medium term. If the US Federal Reserve chooses to complete another round of quantitative easing (normally a negative for the currency) to support a slowing economy, it will be as other global economies are struggling. The USD will be viewed stronger on a relative basis. As a result, we expect issues to do with slowing growth and emerging market debt levels to resurface later this year.