The robust performance of the US economy in 2018 has led to the supremacy of US risk assets compared to the rest of the world. Moving towards the end of the year and into 2019, global investors have started to raise questions about whether the US economy and business sector will continue to shine, how inflation will evolve, and which direction the Federal Reserve will take going forward.
On the macroeocomic front, we think that US growth will continue, with some modest deceleration in 2019 that should prevent a more dangerous overheating of the economy. Personal consumption growth and high business confidence continue to be the major drivers of this sound economic phase. So far, tariffs appear to be having minimal effects on the overall economy, with possibly more pronounced effects on corporate margins. Any meaningful impact may not be felt until later in 2019. After the US midterm elections, two possible paths could emerge. The first path is the emergence of divided government, leading to very little meaningful legislation enacted. The second path is a constructive one where there are areas of commonality between Trump and the Democratic leadership in the House (infrastructure spending). We believe, however, that the overall economic picture will remain broadly unchanged. All eyes will, instead, be on the Federal Reserve, as the major assumption of the outlook is for a gradual tightening in monetary policy conditions with no abrupt increase in rates amid only modest upside pressures in wages and prices. No major imbalances are on the radar at the moment. Hence, an economic recession does not appear to be in the cards next year, but markets are likely to become more circumspect with regard to 2020 growth expectations as the deceleration could become more pronounced.
Based on this backdrop, we believe US asset classes will continue to other opportunities for global investors, but investors will need to embrace a more selective approach.
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