Key points

  • The US should enter a cyclical slowdown in 2019 and the Federal Reserve end its hiking cycle at 3%-3.25%
  • The Eurozone is already slowing down too and we see European politics skewing risks to the downside. The European Central Bank will be prudent and stay put on rates until at least September
  • We have a less positive view on risk assets and are looking to downgrade equities back to neutral over the course of 2019
  • We expect bund yields to remain range-bound in 2019 and see value in treasuries above 3.25%

The last lap of the cycle

As the end of 2018 comes into sight, we take a step back in this Monthly Investment Strategy to present our views for 2019. And as markets are forward-looking – albeit limitedly so, as some would argue – nonetheless, in this 2019 Outlook we discuss our macroeconomic forecasts for the coming couple of years.

The US looks set to post growth of 2.9% for 2018 – its best since 2006. Some of this momentum, underpinned by a spectacular, pro-cyclical fiscal expansion, should continue for some time yet. However headwinds, including fiscal fade, restrictive trade policies, and most importantly in our view, tighter financial conditions, are gathering. This should lead to a classic cyclical slowdown to 2.3% in 2019. For 2020, the current consensus forecast, as well as the Federal Open Market Committee’s, suggests a soft landing but in our view sharp slowdowns are historically more common. Indeed, economies faced with deceleration, typically develop a vicious circle of falling confidence, reduced spending and investment as well as a sharp unwind in inventories. While we acknowledge that anticipating the exact timing of recessions is very difficult, our 2020 forecast sees US growth below potential, at 1.4%.

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