Equity markets remain tied to the Federal Reserve and news on trade.
While the Fed’s job isn’t to make the equity markets happy, its actions and messaging will largely set the tone for 2019.
We remain neutral toward developed equities; economic growth is slowing but we do not expect recession.
Emerging markets are acutely exposed to Fed action and trade tiffs, leading to our underweight position.
Higher interest rates and wider credit spreads throughout 2018 led to flat or slightly negative returns.
High yield has outperformed investment grade debt, which has cushioned against the higher rates.
High yield’s “downside mitigation, upside participation” nature is attractive; fundamentals and technicals remain strong.
The U.S. Treasury yield curve continued to flatten through 2018 — and some parts have actually inverted.
Real assets underperformed the broader equity market in 2018, thanks to the effects of higher interest rates (real estate and infrastructure) and falling oil prices (natural resources).
A more dovish Fed would have positive implications across the real asset spectrum in the year — and years — ahead.
Subdued economic cycles and stronger financial systems will push out the next recession and limit its severity.
Mild Growth Myopia
Two quarters of accelerated U.S. growth showed signs of slowing down toward the end of 2018, but we are not overly concerned.As such, we head into 2019 looking for opportunities to reassert a risk-taking stance.
Low and durable structural inflation has altered both monetary policymaking and investor behaviors.
Inflation remained subdued throughout 2018, remaining below the 2% target.
We expect this theme to continue in 2019, giving central banks an excuse to either pause rate hiking (U.S.) or continue their easy money policies (Europe and Japan)
Without a template for policy normalization, central banks’ efforts cannot be graded – but they must not fail.
The U.S. Fed risked failing our Pass/Fail Monetarism theme in 2018 with their ongoing hawkish rhetoric, but now seem to be finally appreciating the benign inflationary environment. Such a dovish shift would be constructive for risk assets.
Technology has been pulled into the orbit of government oversight, but will remain a constructive force.
Once the driver of equity returns, the tech sector took a turn for the worse at the end of 2018. However we continue to believe that tech offers too many benefits to keep it down for long.
The irreversible fade of legacy multi-lateral institutions is creating as many investment opportunities as risks.
Global (Re)Positioning System
Recent G-20 meetings indicate that our fairly benign views on protectionism are playing out as we expected.
2019 should see a continued move toward a new global system more appropriate for the 21st century.
Investors are accepting leaders who challenge political norms in order to favorably tilt the economic landscape.
Executive Power Drive
Ongoing U.S.-China tensions caused some volatility in the markets throughout 2018.
The upside is that conflicts are now being addressed openly, which should lead to constructive dialog – albeit possibly accompanied by continued volatility – in 2019.
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