17th December 2018
Cambridge’s 2019 Outlook
It’s fair to say that most investors and commentators are taking a fairly bleak view of 2019’s prospects. The rampant US growth engine that drove the global economy forward this year appears to have passed its peak and is likely to slow down further as the sugar high of Trump’s fiscal tax cuts wanes. Every other major region has already slowed markedly and has its own issues to contend with. As markets wade through these myriad problems, they will also face two overarching headwinds: a global liquidity squeeze brought on by tightening central bank policy and the dampening effects of Donald Trump’s trade wars.
It’s crunch time. After more than two years of back and forth, Britain’s ‘will they won’t they?’ drama with the EU is coming to a head. Or is it? The last few weeks may have been theatrical but amount to another bout of kicking of the can down the road. Not wanting to risk her deal’s likely defeat in Parliament, the Prime Minister cancelled the tabled vote and faced a vote of no confidence from her own party for it.
Europe is a bit leaderless and rudderless, but not hopeless. After more than 10 years at the top, Germany’s head of government, Angela Merkel, the most powerful woman in Europe (and in all likelihood, the world) is bowing out. Meanwhile, France’s new kid on the block has lost his reformist shine. Perversely, the one place where leadership looks strong-willed is the one place the union doesn’t want it: Italy.
The world’s largest economy led the pack this year in both GDP and earnings growth. The same was not true for US equities, who despite substantial profit increases end the year down overall. That’s had the effect of pulling stocks back from lofty valuations a year ago to lowly ones now. Both earnings and GDP growth are unlikely to match (or even come close to) their stellar 2018 levels, and there are already early signs that the US economy is slowing. But like everywhere else, the falls in valuations don’t match the expected falls in economic activity. What’s more, recent sentiment surveys point to continued outperformance in the short-term at least.
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