Investors are facing an unsettled environment. For 2019 we think it will be key to look at three areas:
1. From economic deceleration to where? It is time to look at where the economy is heading after the synchronised slowdown that the market has now priced in. A global economic recession is not the central scenario.
2. Fed pausing or continuing rate rises? We do not share the view of some that the Fed will stay on hold from now on, even despite tightening financial conditions, as wage pressures have not disappeared and the Fed’s credibility would be damaged if the market should perceive it as holding back as a result of recent political interference.
3. EMs: perfect storm or a recovery story? EMs have suffered multiple headwinds –higher US rates, the strong USD and idiosyncratic stories. The outlook could stabilise in H1 and improve later on amid a more dovish Fed. Our central scenario sees a soft landing in China as achievable, given the available policy space. Idiosyncratic factors (especially in Latam) and the global trade outlook will be crucial.
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