Most investors will be glad to see the back of 2018 when both US equity and government bond markets generated returns that were lower than cash. Such an outcome has only been registered in two previous calendar years since 1900 and highlights the challenge for investors in the current environment (see Review of 2018 on page 13).
At the start of 2018, expectations were high as a result of the synchronised recovery in global activity in 2017. However, global growth disappointed and remained a concern as trade tensions escalated. At the same time, a stronger US dollar and the tightening of global liquidity held back the performance of risk assets.
In terms of asset allocation, we have moved to a more neutral stance over the quarter by closing our overweight in equities and commodities in recognition of the less positive macro backdrop. On bonds, we remain underweight government bonds and credit given unattractive valuations.
Looking ahead into 2019, there are some key themes for markets. Global liquidity is likely to slow further with the continuation of the Federal Reserve’s (Fed) quantitative tightening (QT) and the European Central Bank (ECB) ending its asset purchase programme. While the tightening of global liquidity and trade wars will not help, a pause in tightening by the Fed could bring relief to dollar borrowers and emerging markets. Populist pressures could also see governments turn to fiscal policy to generate growth (see strategy note on page 24).
Meanwhile, this quarter, we also take a look at the investment implications of the US cycle particularly as we approach the slowdown phase, a more challenging and volatile phase of the cycle (see research note on page 31).
The full Global Market Perspective is available below.
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