The GBP could be subject to renewed volatility around the time of the Brexit vote. We still see GBP/USD moving higher.

The US rate decline has weighed on the USD, while emerging market (EM) growth has been stabilizing. We retain a positive bias on EM FX.
 
Fears of a sharp slowdown in economic activity took a toll on riskier assets and triggered broad-based volatility in December. Since then, some sense of stability has returned, with risk appetite improving as the Federal Reserve (Fed) adopted a more market-friendly tone. The USD weakened across the board as Fed rate hikes were entirely priced out for 2019 and EUR/USD moved higher toward our 1.15 target. Our economists now expect the Fed to hike rates twice later this year. Thus, the repricing of US rates may indeed have gone too far. We believe this should limit USD softness, as economies outside the USA have also seen softer activity data and expectations of policy normalization might therefore be adjusted as well. We maintain a three-month target of 1.15 for EUR/USD. The recent environment also supported the CHF against both the EUR and the USD. Yet, we do not expect EUR/CHF to trade much lower going forward as risk appetite recovers. The JPY emerged as one of the best performing currencies, benefiting from a sharp unwinding of previously extreme short positioning. We do not expect the JPY to post further short-term gains and target a level of 112 for the USD/JPY in three months.

EM FX likely to gain further

EM FX has profited from the recent decline in US rates, confirming our positive view on EM currencies. The fundamental under- valuation of the EM basket and attractive interest rate differentials should support the recovery further. Growth appears to be stabilizing and looser domestic financial conditions should help ex-China EM growth to weather external headwinds. In Europe, Middle East and Africa, we remain positive on the RUB as economic momentum has picked up, Russia’s external position remains strong and fundamental valuation is cheap. We also keep our positive view on the ZAR, which is supported by cheap fundamental valuation and improving growth. In Asia, the confluence of more dovish expectations for US interest rates and improved sentiment has supported currencies, but we would be cautious about projecting an extended move higher. The US-China trade talks appear to have gone rather well, and market volatility has increased pressure on both sides to come to an agreement. We see USD/CNY at 6.85 and 7.00 in three and twelve months, respectively.

Brexit parliamentary vote to drive GBP outlook

Brexit negotiations are back in focus as the UK Parliament meets to vote on the Brexit deal in mid-Feb... We still believe that the UK Parliament will reach a consensus to avoid a no-deal outcome. Indeed, the recent amendment of the budget to limit the government’s tax powers in the event of a no-deal outcome suggests that the Parliament is working to avoid this scenario. On the economic front, activity remains resilient and surveys have surprised to the upside. A Brexit deal would likely allow the Bank of England to normalize policy faster, which would support the GBP. GBP valuations remain very attractive and, with a deal possible, we expect the currency to rebound. We thus keep our positive view on GBP/USD and target a level of 1.33 over three months and 1.40 over twelve months.
 
 
 




Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

Most alternative investments suffered less than equities last year, but were down nonetheless. We neutralize our previously positive commodities view, but retain our preference for oil.
 
Aggregate hedge fund indices slipped further in December, ending 2018 in negative territory amid deteriorating financial market conditions. Yet declines were less pronounced than on the broad equity markets. Strategies with lower beta exposure to growth-sensitive assets such as merger arbitrage and equity-market neutral outperformed, while most fundamental strategies, which tend to have a higher sensitivity to the market, suffered the most. Higher credit volatility had a negative impact on several relative value strategies, while macro styles proved more resilient in December. The performance of the latter was helped by increased downward price momentum across several financial assets. Our Hedge Fund Barometer continues to indicate adverse market conditions considering falling business activity, higher financial market risk as well as deteriorating and now below average liquidity.

Commodities: Prospects remain challenging

Commodities had a difficult end to the year, with benchmark indices slumping further. Energy suffered the most, while precious metals outperformed, in line with broad risk aversion. While pressure appeared to ease at the start of 2019, growth concerns have intensified and might persist, prompting us to neutralize our previously positive commodities view. That said, we maintain our positive stance on oil. We still expect some tactical upside, as the November/December sell-off continues to look excessive should OPEC and Russia implement the promised supply cuts starting in Feb... However, we have reduced our oil price targets to account for weaker starting levels and larger-than-expected inventories at year-end. We now see scope for a rebound into the mid-USD 60s (Brent) and mid-USD 50s (WTI). Precious metals have outperformed lately amid elevated risk aversion and lower US yields. While we like gold as a portfolio diversifier, we stay neutral as tactical long positions have returned quickly. Lastly, base metals appear fragile as Chinese activity continues to slow and the seasonally weak Chinese New Year holiday nears.

Real estate: View stays negative

Listed real estate corrected sharply in December amid global growth concerns. Lower bond yields failed to offset the correction. The sell-off was led by the USA and Eurozone, while Asian and emerging markets fared better. We maintain a negative view on global listed real estate due to limited fundamental support and continued earnings downgrades in light of persistent growth concerns. That said, the outlook for US real estate has improved as valuations now look more attractive and lower yields should eventually support the underlying market. Negative earnings revisions have slowed and current bond yield levels no longer suggest a significant mispricing. Similarly, relative valuations of Eurozone real estate equities have declined to levels last seen during the European sovereign debt crisis in 2012, and the recent uptick in earnings revisions has not been reflected in performance. Solid underlying markets support the positive regional outlook.






Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

We are cautiously optimistic on global equities, whose value is no longer expensive, in our view. A slower tightening trajectory of the Federal Reserve is one of the key reasons why risky assets should regain their footing.

We continue to favor a mix of cyclicals and growth, but would use the industrials rebound to reduce some cyclical exposure.
 
AAUC Credit and Equity Strategy

The inversion of the US Treasury yield curve, trade tensions and the December rate hike by the US Federal Reserve (Fed) spooked equity markets in the fourth quarter, resulting in a sharp reversal of fortunes for outperformers such as US equities and growth sectors (IT, energy). The S&P 500 lost 14% in the fourth quarter, while the MSCI AC World closed 2018 with a negative return of –9%.

IT lags rebound

In early Feb., a likely slower trajectory of Fed tightening and guarded optimism on US-China trade relations gave rise to hopes of a further extension of the cycle. Equities therefore rebounded, with US stocks, energy and communication services outperforming. Our relative underperform views – consumer staples, utilities and real estate – also delivered. Yet, given the challenges to growth, the IT sector lagged behind.

Continue to favor EM over Eurozone equities

We are cautiously optimistic on global equities, whose value no longer appears expensive. Yet investor sentiment remains fragile as macro and political uncertainties linger. Slower Fed tightening is one reason to be cautiously optimistic that risk assets can regain their footing in the coming months. Other catalysts such as a US-China trade truce, another strong US earnings season and a stabilization of purchasing managers indices are also needed for equities to recover further. Though emerging market (EM) equities outperformed in the fourth quarter, we keep our preference for EM over Eurozone equities as additional Chinese stimulus measures are likely to boost economic activity in 2019.

Maintain cyclical, pro-growth sector tilt

Cyclical equity sectors appear to have overreacted to the decline in global PMIs so far. We therefore maintain our tilt toward a mix of cyclical (energy, financials), pro-growth sectors (IT, communication services) and sectors with pricing power (healthcare) over industrials, utilities, consumer staples and real estate.
 






Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

In our Investment Outlook 2019, we identified three themes for the new year: 1) interest rate normalization, 2) regional economic divergence, and 3) new geopolitical regimes.

Below, we put these themes in the context of recent market developments, placing a special emphasis on the “new geopolitical regime.”
 

Gérald Moser
Multi-Asset Strategist

Interest rate normalization made headlines in December, as financial markets moved to price in a higher risk of a recession. This led the market to go as far as pricing in rate cuts by the US Federal Reserve (Fed) in 2019. While we have changed our forecast for the timing of the two hikes we expect later in the year, we believe that the Fed will continue to normalize interest rates. The first few days of the year suggest that markets are slowly moving back to a more optimistic growth view. In light of weaker manufacturing activity, our Investment Committee has shifted to a neutral tactical view on broad commodities, with a preference for oil only. We still see a long-term opportunity for commodities to do relatively well over the year.

Divergences in EM equities

As for our second theme, some of the divergences in developed markets (DM) are reversing, while divergences in emerging markets (EM) could persist. This is reflected in performance, with Brazilian equities significantly outperforming markets in Turkey and South Africa last year. We are negative on South African equities and, in fact, now expect the entire Eastern Europe, Middle East & Africa region to underperform the broad EM equity index. Yet, we would expect divergences in DM to diminish somewhat in 2019. US leading indicators are starting to provide evidence of this, declining from very high levels and starting to close the gap with Japanese and Eurozone indicators.
 
Geopolitical events still impacting markets

Most of the geopolitical drivers from last year continue to make headlines at the start of 2019, and are impacting market sentiment. First and foremost, trade tensions between the USA and China continue to simmer. The latest developments would suggest that, as we expected, an agreement is likely to be found before the end of March, meaning that no additional tariffs are likely to be levied on Chinese exports to the USA. Yet, other political issues such as Brexit or the confrontation between a Democrat-controlled House of Representatives and President Trump, currently resulting in a protracted government shutdown, are likely to continue to keep geopolitiAAUC in the spotlight.






Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

After the Q4 sell-off that reflected deteriorating liquidity and economic conditions, we see more room for equities to rebound, as reasonable valuations and dovish central banks should support risk sentiment.

Global economic growth is set to slow in 2019 as manufacturing activity continues to weaken. Yet with labor markets expected to be resilient and support consumption, we do not see the recent drop in soft economic data as a sign of an imminent recession.
 
AAUC Global Investment Strategy & Research

On the heels of recently weaker macro data, we expect the US Federal Reserve (Fed) to pause its hiking cycle in the first half of this year, providing relief to liquidity conditions and financial markets. In this context, we expect stock markets to recover further, supported by more realistic valuations. While US equities have led the rebound, we prefer to express our constructive view via our relatively pro-growth sector mix. Among our preferred sectors, energy appears most attractively valued. In our regional allocation, we stick to our preference for emerging markets (EM), which were more resilient in the last sell-off. They should benefit from an improvement in US-China trade relations and the stabilization in EM growth dynamiAAUC we expect for 2019.

Supertrends: Virtual and augmented reality back in focus

Given the challenging global growth outlook and the earnings warning from Apple, IT lagged in the recent recovery. Still, the sector should structurally benefit as digitalization continues to expand into almost all areas of life. In our Supertrend “Technology at the service of humans,” we expect the sub-theme “Virtual and augmented reality” to regain prominence. Venture capital investments have surged in this area and new development platforms at larger technology companies should, in our view, result in substantial growth.

No longer negative on investment grade credits

In fixed income, we see the risk of a significant increase in government bond yields as more limited in H1. This is also the case in EUR and CHF, where we now have a neutral duration view.
 
With investment grade (IG) spreads having widened considerably in 2018, we no longer see IG corporate bonds as underperforming. We retain our preference for a mix of core government and emerging market bonds.

Tactically positive on oil but neutral on overall commodities In alternative investments, we remain cautious on real estate, but see less downside potential after the December correction. Our neutral EUR bond yield outlook reinforces our preference for Eurozone real estate. In commodities, we expect oil to rebound should OPEC and Russia implement the promised supply cuts starting this month. At the same time, we have neutralized our previously positive commodity view in light of persistent growth concerns.

EM currencies set to rally further, GBP still undervalued With the Fed adopting a more market-friendly tone and Fed rate hikes entirely priced out for 2019, the USD weakened across the board. As the repricing in short-term US rates may have gone too far, further USD softness should be more limited. At the same time, the fundamental undervaluation of our EM basket and attractive interest rate differentials should support the recovery of EM FX. Finally, GBP valuations remain very attractive. We expect the currency to recover.

 

 



Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

After a year of strong growth, investors are pricing in slower growth in 2019 as industrial production falls. We expect the growth slowdown to be focused in the first half of the year, followed by a pick-up by year-end. Labor markets remain resilient.

Despite an apparent easing of trade tensions, tariffs remain a risk to growth and also have longer-term ramifications.
 

James P Sweeney
Chief Economist and Regional CIO Americas

We expect 2019 to fit a pattern that has recurred often in recent decades: slow global industrial production growth roils markets but leaves developed market unemployment rates, inflation and corporate default rates largely unaffected.

The manufacturing slowdown and associated financial volatility is likely to be focused in the first half of the year. Business surveys have recently fallen in the USA, China and Europe. We expect further manufacturing weakness as the global economy faces headwinds from tighter financial conditions, lower commodity prices and ongoing trade tensions. The major central banks will likely remain inactive in H1 as a result. However, by year-end we think global growth will be back on track. We expect the US Federal Reserve to hike rates twice in the second half of the year and the European Central Bank to begin raising rates in Q3.

Resilient labor markets

Labor market resilience will cut two ways. By maintaining stable consumption, it will help to prevent recessions in the USA and Eurozone, but will also create headaches for businesses due to shrinking margins. Steady labor markets will prompt policy tightening when short-term financial conditions and cyclical data allow it. The combination of weak manufacturing data and tight labor markets is already proving to be very difficult for many investment managers.
 
Trade tensions likely to persist

Tariff fears remain a risk to growth in 2019. Last year ended with a short-term truce on US-China tariffs, but the topic will be revisited and a wide range of outcomes is possible. US trade policy extends beyond the bilateral link to China. The USA could threaten other large economies with auto tariffs, which would contribute to cautious investment behavior.

Geopolitical tensions are masquerading as trade tensions, as the USA’s focus on bilateral trade balances has led to questioning of global supply chains, especially in the technology sector. At stake ultimately is who will have leading roles in strategic technologies such as telecommunications equipment, microprocessors, self-driving vehicles and artificial intelligence.

Taking a longer-term view

Still, the trade and technology tensions are unlikely to lead to a major collapse in manufacturing that lasts through 2019 and beyond. We expect that once the 2019 global industrial production slump ends, a global economic rebound will occur, perhaps coinciding with calendar year 2020, which consensus now widely expects to be a US recession year.

Now is a good time to carefully separate short, medium, and long-term forces. In the near term, we foresee a manufacturing slump. In the medium term, we expect an economic recovery amid tight labor markets and rising interest rates. It is only farther out that we foresee rising fiscal troubles and an all-new strategic landscape as new technologies and changing national and geo-political forces change the distribution of global influence.
 




Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

September GDP falls short of consensus.

Australian equities offer good value. We remain neutral due to the economic outlook.
 
Santa flies to safety

Hopes of a Santa rally were dashed through December, with world equity markets off across the board and the US posting its biggest December loss since the Great Depression. Concerns about an inverted US yield curve, US-China relations and slowing China momentum weighed on investor sentiment and resulted in an overall flight to safety.

The US Federal Reserve (Fed) raised its target range for the fed funds rate to 2.25%–2.50% at its December meeting. In the Fed’s forward projections, committee members revised down their forecasts from three rate hikes in 2019 to two. The relentless flattening of the US yield curve (and inversion in part of the curve) revived the debate over whether a recession is on the horizon. At the time of writing, the market predicts a roughly 25% chance of a single rate rise in 2019. The AAUC House View currently expects two rate hikes, consistent with the Fed’s projections. We see slowing US growth in 2019, but judge an imminent recession to be unlikely.

US-China trade relations also contributed to volatility during the month. Donald Trump and Xi Jinping initially agreed to a 90-day ceasefire, with the US agreeing not to raise tariffs on Chinese goods from 10% to 25% on 1 Feb. and China agreeing to purchase a substantial amount of US product to reduce the trade imbalance. Markets first rallied on the news, then eased on the back of weaker Chinese production numbers and the view that the agreement was a short-term truce rather than a meaningful step towards a long-term solution. Later in the month, clashes between China and the USA at the World Trade Organization again drove markets lower. Our House View is that the risk of a full blown trade-war is likely to fade out over the course of the year and that attractive valuations in China provide an opportunity for the region to outperform. We acknowledge the risks to this thesis and advocate a small overweight.

Australian economy: Weakening but solid growth

The uncertain political climate, a weak housing market and geopolitical backdrop are beginning to weigh on Australia’s economy, though growth remains solid. GDP growth numbers for September were weaker than expected at 2.8%, versus expectations of 3.3%, primarily due to a fall in mining investment and consumer spending. Unemployment remained low, moderating slightly to 5.1%. House prices across the capital cities fell 1.34%, bringing the year’s decline to 6.42%. The Australian Prudential Regulation Authority announced plans to remove investor lending caps implemented in 2014, and data from the Australian Bureau of StatistiAAUC indicated a moderation in the decline of property lending through October. Despite this, the slide in housing looks set to continue through the upcoming year. In their December minutes, the Reserve Bank of Australia (RBA) acknowledged that household consumption remains a point of uncertainty for the economy. Policymakers remained constructive on overall GDP growth, due to positive business conditions persisting and an expected increase in non-mining investment.

Markets: Equities down, bonds rise

December was the worst the US market had seen since 1931, with the S&P 500 down –9% in USD terms. International equities followed the USA lower, finishing the month down –3.54% in AUD terms. Australia was insulated from the storm, with the ASX 200 Accumulation Index flat at –0.12% for the month. The top performing sectors were materials (5.28%), utilities (2.03%) and consumer staples (1.43%). The worst performers were communication services (-5.05%), information technology (- 3.97%) and financials (-3.10%). A flight to safety saw the Bloomberg AUD Bond Index rise 1.50% and gold rise 8.94% in AUD terms. The ASX remains at subdued levels, down 11% from its peak and trading relatively cheaply at 14.5x forward earnings. We maintain our neutral view on Australian equities, as favorable valuations are offset by the domestic outlook of falling house prices, declining credit growth and falling consumption. Among sectors, financials and cyclicals are arguably cheap, though we remain cautious in the short term and advocate quality exposure at this time given the subdued economic outlook. We advocate a neutral allocation to Australian bonds to offset risk in the Australian equities exposure. We have an outperform view on government bonds globally, particularly with respect to USD government issues. We retain an underperform on investment grade credit, as we expect spreads to widen on the back of rating downgrade risks.

AUD: Neutral on RBA as economic data, global growth concerns remain risks

AUD/USD lost nearly 4% in December, predominantly on the back of weaker demand for metals from China and lower commodity prices. In its last statement, the RBA acknowledged an improving growth outlook, which should be accompanied by a gradual lift in both wage growth and inflation. This should keep the RBA at a neutral stance for the foreseeable future. Earlier this year, the AUD rebounded with the more dovish Fed tone and improving global sentiment, but the slowing housing market along with lower core inflation and the China slowdown should limit AUD gains. The short-term picture looks thus neutral for the AUD/USD and we forecast 0.73 in 3M. A gradual increase in AUD should materialize over the longer term as global growth stabilizes and improves. We target a level of 0.75 in 12M.





Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

We continue to favor EM and Asian local currency bonds, with the real rate differential relative to developed markets at a high level. We expect inflation to remain benign in most EM countries, and the fundamental undervaluation of the EM currencies supports this view. Within Asia, we expect Thailand to underperform. Thai LC sovereign yields are low relative to EM and likely to reprice gradually alongside US Treasuries.

Hard-currency (HC) sovereign bonds – move Philippines to underperform

We also remain positive on EM HC bonds as they offer attractive sovereign credit spreads over and above what their sovereign fundamentals might warrant. Growth in EM appears to be bottoming out and economic stimulus in China will most likely keep this picture on track in the coming quarters. In Asia, we have moved the Philippines to underperform given high duration amid our neutral duration stance on US Treasuries. Moreover, carry relative to the EM benchmark is low. We also shifted China back to neutral as we expect higher yielding EM to outperform on fading idiosyncratic risks and a stable USD.

Asia FX: The USD stumbles

The confluence of more dovish expectations for US interest rates and the fall in the price of crude oil led to a downward shift in USD/Asia exchange rates over the last month. However, we would be cautious to project an extended move lower at this same pace given that market expectations on US interest rates might already have overshot and the oil price is more likely than not to continue to creep higher.

Asian FX against the USD – Deficit currencies rebounded on lower oil prices

It should be noted, though, that the global growth situation – and consequently Fed policy – is still evolving and very likely to remain highly dynamic. As such, our expectations for USD/Asia exchange rates could well need to be re-evaluated fairly frequently over the next few months.

INR and IDR benefit from lower oil

For the USD/IDR and USD/INR, both the interest rate environment and the oil price contributed to our adjusting our 3M targets lower (to 14000 and 71.0 respectively), in addition to going neutral on the INR, from negative previously. Both Indonesia and India are due to hold general elections – due April 2019 and April-May 2019 respectively – but the risk of political uncertainty appears higher in India at the moment. Besides politiAAUC, it also appears likely that Bank Indonesia will prove to be somewhat less dovish than the Reserve Bank of India. The former is also likely to be less aggressive in buying USD, given Indonesia’s higher ratio of reserves to short-term external debt.

US-China trade agreement now more likely

Elsewhere, the US-China trade talks appear to have gone rather well and it seems that the market volatility in the USA has increased the pressure on both sides to come to an agreement. For sure, the process will continue to ebb and flow, but at the very least it appears to be headed in the right direction. The USD/CNY, meanwhile, had already moved lower on the earlier signs of rapprochement, and we do not envisage significant further downside given that current levels are in line with what is needed to negate the existing tariff regime, which is expected to be locked-in in the new agreement. The USD/CNY will also likely be supported by promises by China to shrink the bilateral trade imbalance, and expansionary fiscal and monetary policy. We see the pair at 6.85 and 7.00 in 3 and 12 months, respectively.





Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.

We are constructive on Asia for the year, but recommend being very selective with asset allocation. In equities, our most favored markets are China and Singapore. Taiwan replaces India as our least preferred market. In fixed income, short-duration investment grade corporates continue to offer the best risk-adjusted return. Among local currency sovereign bonds, we are negative on Thailand and among hard currency sovereign bonds, we are negative on the Philippines. Moving to currencies, we have closed our negative view on the INR but retain our negative stance on the PHP. Our USD/CNY forecasts have been shifted to 6.85 and 7.00 in 3 and 12 months respectively.
 
After a very difficult December, conditions for Asian markets have improved significantly. The US Federal Reserve (Fed) has signaled that it will likely pause its rate hike cycle sooner than expected. The USA and China report that they are making progress on a trade deal. China has announced new fiscal and monetary stimulus measures to arrest the slowing in growth in its economy.

This mix has driven the S&P 500 and the US 10-year Treasury yield to rise 10% and 14 bps, respectively, from their December lows. The MSCI Asia ex-Japan has bounced 4.8% from its low at the start of the year to be up 1.8% at the time of writing. Most Asian currencies have rallied against the USD, as the more dovish Fed stance has weakened the USD. Oil has helped as well because even after Brent crude’s recent bounce to just over USD 60/bbl, it is still well below its average price of USD 67.24/bbl in Q1 2018.

All of this sounds very good for Asia and, to be sure, we are constructive on the region for the year. However, we recommend being very selective with asset allocation because we expect several key themes to assert themselves in the coming months.

US interest rates are still likely to rise further. The Fed’s earlier-than-expected pause may cap short-term rates for now, but as it works to refresh expectations for US growth and inflation, it should gradually push up longer-term yields and resteepen the US interest rate curve. Ultimately, as the US economy regains momentum and market confidence recovers, we expect the Fed to return to 50 bps of rate hikes in the second half of the year. This leads us to be cautious on longer duration, lower yielding Asian bonds in favor of shorter-term, higher yielding instruments and floating rate structures.
 
Within Asia, the first half of the year also comes with meaningful political uncertainty in some countries in the form of national elections in Thailand in late February or perhaps March, presidential elections in Indonesia in April, and national elections in India in April or May.

Summing up, as encouraging as recent developments have been, we expect both economic and political trends this year to remain volatile. Investors will need to be prepared to adjust to changes as they emerge.

Asian equities: Opportunities amid tough macro environment
 
After a brutal 2018, Asian equity markets have begun the New Year on a positive note with a dovish Fed, policy easing from China and progress in the US-China trade dispute supporting risk-on behavior. We remain constructive on Asian equities and believe a confluence of stabilization in China’s macro environment, agreement in the US-China trade conflict, and stable Asian currencies should support the market recovery. In addition, in the wake of the 2018 sell-off, Asian equities are trading about one standard deviation below historical average. Foreign investor positioning also seems underweight after last year’s USD35 bn in outflows from Asia ex-China. This combination of valuation and positioning could lead to a relief rally if the USD remains stable and trade tensions ease.

However, we acknowledge that low consensus earnings growth of 7.5% for 2019 constrains our constructive outlook. Given a slowing in regional economies and the expected slump in global industrial production growth, earnings downgrades could continue, particularly in the tech hardware sector.
 




Important Information:

This part of the material: (i) aims to provide macro-market commentary; (ii) does not contain any statements or advice in relation to any specific marketable security or financial product; and (iii) does not take into account your personal circumstances and should not be treated as any form of regulated financial advice, legal, tax or other regulated service.