2019 Outlook: Worlds apart – something has to give
The disruptive divergence we called for in our last Outlook is playing out as expected. The US economy moves full steam ahead while China continues to slow, despite renewed fiscal and monetary easing. Since global monetary policy is by-and-large determined in Washington while global growth is still largely driven by China, this divergence means trouble for markets. The consequence is that monetary conditions driven by a strong US economy are becoming too tight for the global economy as a whole. We therefore expect the global slowdown to continue. In that context, the correction in October is a reminder that risk assets’ pain threshold with respect to broader monetary conditions is within reach and the peak in equities is getting closer. Risk assets should remain under pressure in H1 2019, while the second half might offer some relief for investors as bad news becomes good news: The tailwinds for the US economy should fade as external risks build, allowing the Fed to put tightening on hold.