Four themes to look out for in 2019
There’s a lot for investors to think about as we kick off 2019: the UK’s impending departure from the European Union is just months away, there are ongoing trade tensions between the US and China, and central banks around the world plan to tighten monetary policy.
As risks build across the global economy, Phillip Smeaton, chief investment officer of Sanlam UK, highlights four themes for investors to keep an eye on in 2019:
- Slowdown in the US economy
Although the US economy continues to outpace the rest of the world, there are early signs of weakness.
Unemployment is still low but there have been some meaningful lay-offs, namely Ford and General Motors. It’s not clear if these lay-offs are down to a generally slowing economy or just challenging conditions within specific industries, but we’ll be watching closely to see if other sectors follow suit.
We’re also seeing US home sales declining, with properties proving harder to shift. Indeed, the housing inventory available to buy shot up from 4.9 month’s supply at the end of May 2018, to 7.4 month’s at the end of October 2018 – a clear sign of a slowing property market.
At the same time, we’re seeing banks extending less commercial credit. That means fewer businesses are borrowing money, which in turn could lead to slower growth and lower company earnings.
These could all be signs that US growth is slowing down to a more sustainable level, where continued productivity gains and modest population growth are the structural drivers. We’ll be monitoring how growth responds to more restrictive monetary policy, and provided the slowdown is modest, equity returns should be acceptable.
- A resolution to trade uncertainty
The outlook for the US economy is also obscured by its ongoing trade war with China. In late 2018, the International Monetary Fund (IMF) reduced its growth expectations for the US from 2.9% to 2.5%, citing the trade war as its key concern.
So far, China seems to be bearing the brunt of the stand-off. By the end of last year, exports dropped from 12.6% in October to 5.4% in November, while imports dropped from 20.3% in October to 3% in November.
The ripple effect of this political posturing has been felt across the world. Big trading partners with China, including Germany and Japan, recently reported a single quarter of economic contraction at the end of 2018.
As we start a new year, there seems to be little hope of resolving the crisis between the two super powers. Perhaps a weakening in US economic growth could prove to be the catalyst for making this happen?
- Will banks continue to extend credit?
One of the big questions this year is whether companies will be able to grow their earnings. There are two ways of doing this: improving productivity by reducing costs, or achieving growth through sales, which is usually driven by product development and investment.
The latter is inextricably linked to the ability of banks to extend credit to businesses, and the willingness of those companies to take on the debt.
The banking system has been extending less credit in recent months, which gives us cause for concern. We’ll be keeping a close eye on this as the year progresses, as it is likely to impact earnings growth in the months and years ahead.
- Normalisation of monetary policy
The continued normalisation of monetary policy, which refers to the withdrawal of quantitative easing and a move towards raising interest rates, is now being questioned as several members of the US’s Federal Open Market Committee are concerned about an ‘inverting of the yield curve’.
This happens when long-term interest rates fall below short-term interest rates, and typically indicates the likelihood of a downturn (perhaps even a recession).
If this scenario plays out there could be a pause in interest rate hikes, as central banks appraise whether economies can handle higher interest rates.