Economic and Strategy Viewpoint - February 2019

- Dismal eurozone macroeconomic data has prompted concerns that the monetary union may be heading for recession. Leading indicators continue to worsen amid signs that temporary shocks are spreading through the economy.

- Despite the weaker economic environment, are European risk assets already priced for recession? Fund managers are already underweight, and the consensus amongst strategists support the view. Our analysis shows that the DAX equity market suggests that there is a 56% probability that Germany is in recession.

- It seems that a recession is already priced. As we are not forecasting a recession, any sign of a turnaround should spark a rally and the outperformance of European risk assets.

- There is a building consensus that 2019 will prove a better year for emerging market (EM) assets than 2018. Given that the overall equity index fell over 14% in 2018, almost no EM currency delivered a positive return and the Emerging Market Bond Index (EMBI) lost 5.3%, this does at least set a low bar. Nonetheless, when we look at the likely macro drivers, the picture is somewhat mixed.

- Dollar weakness is helpful, but a dim outlook for trade and China should prompt caution, and may favour debt over equities.

- The economic relationship between Australia and China is more than just resource exports, as recent trends show that China’s ongoing transition to a consumption-driven model has been a significant contributor to the expansion of Australia’s services sector.

- While this transition is still at an early stage, China’s dominance of Australian commodity exports is set to remain, and so the dependence of the Australian dollar on China’s manufacturing activity will persist, with the currency likely to keep its role as a market sentiment barometer toward the Asian economy.

Please find the full Viewpoint below.