With 2018 closing with a global sea of red, 2019 would likely be a year of tremendous challenges. The Federal Reserve have indicated in December that further rate rises may not be required and at the same time reduced the forward growth outlook. With stock darlings FAANGs currently in a bear market and broader markets weakening, it is now clear that the negative sentiment is already set. Although the massive stimulus from US tax cuts and fiscal spending gave the economy a shot in the arm in 2018, the effects are about to wear off very soon, possibly causing further pressure to markets. Also, due to the congressional gridlock arising from the US midterm election, boosts coming from further tax cuts and fiscal stimulus are now even less likely.
The unsustainable high valuations are already facing headwinds as seen from this wave of global sell-off. Adjustments on Wall Street are already underway and have further cascaded into souring investment sentiment globally. Despite this, it does not seem that the full effects of quantitative easing’s withdrawal is yet priced into assets. The removal of easy money takes away the artificial inflation that propped up markets. As central bankers across the world start to pull the plug on easing policy, it is evident that an end to the bull run in global stocks is not far away and investors should be prepared for late cycle heightened volatility and further falls.
As such, the rate differentials that supported the Dollar’s ascent would soon disappear and the strength of the dollar seems perceived to be fading. Although this would mean that the headwinds to emerging market debts from a strong Dollar would soften, the concern now lies in global slowdown. Though synchronised fiscal expansion in several countries may moderate the pace of such an event, it is now clear the world’s growth engines are no longer firing on all cylinders, thereby hurting risk assets such as equities, commodities and real estates. Not to forget trade tensions brought about by the US have yet to see any de-escalation.
With geopolitics never failing to create turmoil in global markets, we remain focused on the key concerns surrounding the political arena. Even after more than a year as president, Trump remains a political wildcard as he turns the post-war America ideologies of free markets and democratic governance into isolationist and protectionist paths. This created tensions in international relations, impacting global trade through tariffs, destabilising Middle East through military withdrawal, and more importantly, breaking down the US-Sino ties through the suppression of China’s global ambitions at a time where the Chinese Communist Party is facing reform pressures arising from economic struggles.
To make things worse, the Brexit political chaos, Yellow vest movement in France, and Italian debt crisis, all threaten the breakup of an already fragile Europe. It seems there is no shortage of strife weighing on global sentiment in 2019.
With the uncertainty and volatility that is expected up ahead in the gloomy financial markets, investors globally are scrambling to search for suitable solutions to hedge, protect and grow their wealth. Unsurprisingly, this means that most of them would be forced to step out of their “comfort-zone” and re-consider their over reliance on passive portfolio investing; which was largely propelled by an unprecedented period of quantitative easing across the last decade. In fact, since many years ago, in both media interviews and seminars, I have repeatedly cautioned investors of the risks in over-relying on passive portfolio investing. Instead, at CP Global, we are strong advocates that an active approach to investing is crucial to stay ahead of markets.
Additionally, we believe focusing on an active investing approach and leveraging our global macro expertise, will be our best defence during these uncertain times.