After a relatively calm and extended years-long bull run, the market has finally started to cramp up. February’s turbulence jarred many investors and firms, but other signs that appeared late this year suggest that uncertainty is back, and it’s making itself comfortable.
Looking from a macro perspective, Capital Group highlighted three trends driving the volatility that’s likely to persist into 2019. “[T]ightening, trade tensions, and too much debt … are combining to disrupt global markets at times and put investors on edge,” the firm said in its latest 2019 market outlook.
With the US seeing a strengthening economy, a tight labour market, and moderately rising inflation, the Federal Reserve is expected to continue raising short-term interest rates in 2019 — an unfavourable trend in the context of rising corporate and consumer debt. And with the US, China, Europe, and other players who “seek to rewrite the rules of world commerce in their favour,” Capital Group sees a highly fluid situation that will be playing out for a long time.
Still, that doesn’t mean a US recession is due. According to Jared Franz, one of the firm’s economists, the buildup of imbalances hasn’t amounted to what typically triggers a recession. The current average US economic growth rate is among the slowest in history, which generally has prevented major imbalances from arising. However, he expected that “the risk of a recession will rise throughout the year.”
International equities also appear relatively more attractive than the US, the firm said. It cited the US market’s forward P/E ratio of 15.3, notably higher than other major markets. Emerging markets, meanwhile, current hold a relatively modest share of global market cap relative to their contribution to the world’s GDP, which is expected to swell to 50% by 2021. While international and emerging markets have lagged the US badly for nearly a decade, Capital Group argued that the trend is bound to reverse. “Now is the time to look for opportunities in places where other investors are running away,” asserted Capital Group portfolio manager Andrew Suzman.
However, the firm cautioned, emerging nations that supply raw materials to China may be impacted by the country’s slowing economy. “China’s economy is still growing at a decent clip: 6.5% annualized, according to the official numbers,” the firm said. But considering its double-digit growth just a few years ago, the firm argued that the country’s economy is being weighed down by weakness in consumer spending, manufacturing, credit growth, and the housing market.
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