Slower global growth may mean taking the long view


Global equities face a more uncertain year ahead. Nothing looks likely to drive stocks sharply lower for an extended stretch, but we see few positive economic or earnings surprises on the horizon to provide a significant boost.

In 2019, economic growth looks set to moderate globally, US interest rates should rise further, trade tensions may remain heightened and European politics could again be a concern. That noted, the global economy should continue to expand at a healthy rate and corporate earnings can continue to grow moderately, in our assessment, potentially leading to less expensive equity market valuations over time. In what looks likely to be a sideways trading market, we believe individual stocks can still shine.

Slower Global Growth Ahead

The United States was a standout—both in terms of its economy and its equity market—for much of 2018. But as the modest fiscal stimulus from federal tax cuts rolls off and as the US Federal Reserve is expected to continue raising rates in 2019, we see the potential for economic growth rates to come down more substantially than in the eurozone and Japan, and for US equity markets to struggle for direction. The International Monetary Fund (IMF), for one, cut its US growth forecast to 2.5% for 2019, a slowdown from the 2.9% growth predicted for 2018.

Growth rates in both the eurozone and Japan, meanwhile, are likely to remain relatively steady over the next year as monetary stimulus bolsters growth and weaker currencies relative to the US dollar support exporters. The IMF predicts that eurozone growth is likely to remain around 2% and Japanese growth should come in at about 1% in both 2018 and 2019. Steadier growth may provide more support to non-US stocks than US stocks in 2019, in our view.

Despite steady growth in Europe, politics could be more of a concern. Italy’s populist government and the European Union (EU) may continue to wrangle over the country’s budget and other issues. Moreover, Europe’s most high-profile leader, German Chancellor Angela Merkel, resigned as head of her political party, marking what we believe is the beginning of the end of her political career.

The global economy and equity markets are also unlikely to get much help from China or other major emerging markets. While Chinese growth has remained sturdy, the trade war with the United States has started to bite, forcing policymakers to take steps to stimulate activity. Until the United States and China begin serious talks aimed at ending the tit-for-tat tariff increases, we expect the pressure on the Chinese economy is only going to continue. A stronger US dollar, higher US interest rates and more expensive oil prices are not conducive for broad-based gains in other emerging markets either.

Taking the Long View

We anticipate that corporate earnings are likely to continue to grow modestly over the coming year, but should not accelerate meaningfully, particularly in the United States. And while the earnings recovery in Europe and emerging markets has lagged the US recovery, we do not expect a significant improvement in those countries given the more uncertain economic outlook. As a result, earnings are unlikely to provide a major catalyst to push global stock prices higher, in our assessment. However, as earnings grow, stock market valuations could begin to look less expensive on a price-to-earnings basis as 2019 progresses.

With robust but slowing growth, rising US interest rates, moderately growing corporate earnings, trade tensions and political uncertainty, we believe investors will need to take the long view. Few sectors are likely to stand out, given the various uncertainties hanging over the markets, so individual stock selection is likely to be more important.

Companies that continue to innovate, have strong competitive market positions and are poised to take advantage of durable growth trends—like cloud computing or autonomous driving, for example—should have the potential to perform well over the longer term, in our view. The overall equity market may not make much progress in 2019, but we think individual stocks still can.

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