2019 Global Economic Outlook
Entering a new year, investors assess the landscape carefully to profit from the shifting tides. In the following forecast we look at predictions made by expert institutions regarding some of the macro changes the 2019 global economy will undergo.
A Global Perspective
The Global Economy is subdivided into two main categories: emerging and developed economies. Global economic growth for 2018 was 3.8%, indicating a period of expansion.
The World Economic Bank projects that global growth will stabilise down to 3.1% over 2019. Though lower than the previous year, this figure represents healthy economic conditions and is caused by the firming (a period of improvement when security prices tend to rise or to stabilize at current levels) investments correlating with the recovery of export commodities in emerging markets. In addition, the World Bank projects a significant 4.7% growth rate within the emerging economies over the next 2 years (2019-2020).
UBS projects a slightly less optimistic 3.6%. The drop from 3.8% will be primarily driven by the Fed’s constrictive interest rate policy. Additionally, UBS considered a global economic recession in the year 2019 unlikely given current levels of investments, consumption and employment. UBS “think[s] the typical causes of a downturn are unlikely to materialise in 2019”.
Schroder's has a more modest projection of 2.9%. They place significant consideration towards the negative implications of rising US interest rates and the ongoing trade war tensions with China. Furthermore, a weaker US dollar could act as a silver lining for potential in emerging economies. A stronger dollar and higher interest rates in 2018 meant that foreign central banks had to tighten monetary policy to effectively borrow the USD. The stronger dollar also meant higher commodity prices and a weakening of world trade. A weakening of the dollar would unwind these implications and ease financial conditions, thereby strengthening emerging assets.
Region-specific Outlooks
Three major regions and their 2019 prospects will be considered here, namely the United States, the Eurozone, and South-East Asia (with an emphasis on China).
The two biggest factors to consider for the new year within the US are the continuing trade war with China as well as increasing interest rates. Additionally, European politics will remain an influencing factor even on the US economy. Goldman Sachs drew notable attention for their pessimistic forecast of growth throughout 2019 at 2.9%. GDP growth will slow to 1.8% in the third quarter of 2019 and to 1.6% during the fourth quarter. A significant cause is the fading positive effects of the formerly passed tax cuts. The growing trade deficit for the US is caused by the increasing imbalance between demand for imported goods and the demand for US goods abroad. This deficit, combined with other factors, is continuing to motivate the Trump administration to pursue tariffs on imported goods. As covered in detail previously, markets react with volatility to the aforementioned policies, and investors become defensive in their strategy. Asset management firm PIMCO has increased the probability of a US recession to 30% for the year 2019, higher than at any other point during the last 9 years. On the positive side, US consumers are the wealthiest they have been in the history of the country, household wealth having increased by $46 trillion (83%) since the 2008 recession. Additionally, consumer spending is also at an all-time high at $12,953.29 billion for the third quarter of 2018. Jobs and businesses (primarily in manufacturing) are continuing to grow steadily, consumer confidence continues to rise (93.1), and the potential for new trade deals to become a net benefit exists. Although the future consensus is one of slowed acceleration, 71% of global CFO’s believe the US economy will remain strong for the next three years, a sentiment with which AMSA concurs.
Forecasts for Europe are coming on the heels of underwhelming figures from the third quarter in 2018, which saw GDP growth at 0.2%. Quarter four was not significantly better, with an expected growth rate of 0.4%. For contrast, growth averaged around 0.7% over all of 2017.
Growth forecasts for 2019 range between 1.4 and 1.9%, depending on the party asked. A solid economic recovery is assumed to come on the back of income growth, resilient labour markets and decelerating headline inflation. Certain risks, however, continue to concern experts and are bound to cause volatility and uncertainty in the markets over the next year. Trade tensions, as well as continuing contentious political circumstances are among these. Just recently, Europe’s political divides have been the cause for Brexit, severe Italian budget problems, and Spain’s referendum on Catalonia, just to name a few.
Other factors indicate that despite the uncertainty, the foundation of the Eurozone economy remains relatively solid. Private consumption has increased by 8% since 2013 and consumer confidence remains extremely high. Unlike the Fed, the ECB is expected to keep interest rates at the current level, however the Quantitive Easing scheme has ended in December 2018. The scheme has been considered extremely effective in boosting the European economy following the 2008 crash. It will remain to be seen what impact the omission of Quantitive Easing will have within the Eurozone.
Finally, the South-East Asia region is analysed, its primary drivers being the Chinese, Indian, South-Korean, and Japanese economies. As a large part of the region is classified as Emerging Markets, growth is projected to be 5.2% between 2019 and 2023, a faster rate than seen between 2012 and 2016. China is expected to experience decelerated GDP growth, while the Indian growth rate remains constant. The region has proven itself incredibly robust to the recent trade tensions. Labour market stability and exports are the driving forces for this high level of growth. A major factor for Asian consumer confidence is that relations between Western nations and North Korea have momentarily stabilised. During 2018, Asian central banks have opted to let their currencies weaken against the USD, putting them in a favourable trade position in the coming year, which is expected to aid further growth.
An interesting development out of the US-China trade war is that companies may seek to reallocate in Thailand, Malaysia, and Vietnam in order to avoid US tariffs. This global production shift is evident by the strong recent performance of the equity markets in these regions. China as the largest economy is pulling the region ahead through its attempts to combat US tariffs. They have extensively increased their infrastructure and loan spending to boost economic growth.
Industry Breakdowns
Previously we assessed the overall economic conditions within three major regions. For successful investing, distinguishing early between favoured and unfavoured industries within a country is vital for further detailed research throughout the year.
United States
The energy sector in the US has been performing poorly under the late 2018 sell-off. This is largely attributed to rising oil costs. For 2019, however, the general consensus is an expected 30% earnings growth within the industry, especially with the recent supply cuts by OPEC.
The communications services sector is expected to see earnings growth of 10% in 2019. New media and software industries, facilitated by the ever-developing online frontier, may yield highly profitable opportunities, but can generate potential competition as well.
The healthcare industry is at the forefront of receiving the full benefits of the ageing baby-boomer generation, and therefore represents another extremely promising industry for 2019.
Eurozone
Since the oil price slump between 2014 and 2016, energy companies in Europe have recovered extremely well and are predicted to perform well in 2019. Balance sheet figures are strong whilst oil prices are recovering. Major energy companies across Europe are generating positive cash flows while successfully decreasing leverage. As with the US, OPEC’s supply cuts are a favourable policy shift for energy producers.
Healthcare will also reap benefits from the baby-boomer generation in Europe, combined with ever increasing life expectancy, and, in most European countries, an ageing population. The European healthcare sector has outperformed the recent periods of European market uncertainty, in part because 40% of its revenue is generated in the Americas, which will continue to be the case.
The financial sector has suffered most under the political tensions in the region. Yet, data shows a positive outlook for 2019. Earnings Per Share growth is an expected 15%, dividend yield 4%, whilst the current price-to-book valuation of the sector is 0.7.
Information Technology (IT) has suffered terribly in the later stages of 2018. Nevertheless, forecasted earnings growth lies at 19%, and is expected to bounce back significantly in these markets. IT, more than most markets, will benefit significantly from the ongoing global economic growth expected in the coming year.
Asia
Earnings growth in healthcare continues in Asia. Regulatory tightening and poor market sentiment led this sector to sell off during late 2018, along with IT. In recent years, Asia has been making significant improvements in life expectancy, meaning their large population will soon create a massive consumer base for both healthcare and insurance providers.
IT was sold off heavily during 2018 for similar reasons as healthcare, yet the sector remains to be extremely promising due to two factors. Firstly, the region has a well-educated talent pool, much of which has previously been exported to America. Secondly, Generation Z (individuals born between the mid 90’s and mid 2000’s) is expected to exceed millennials as the largest generation in 2019, specifically in the Asian region. This generation is more technology consuming than any before it, providing a huge potential customer base.