2018 ended with a bit of a bang. A combination of trade worries, US political uncertainty and concerns about growth caused risky assets to sell of and raised some important questions as we go into 2019.
US monetary policy has been a real focus of attention over the past few months and December was no exception. The Fed hiked by 25 basis points, as expected, but the markets concerned are now increasingly focussed on growth and the question as to whether or not the Fed has already hiked too much given signs the US economy is beginning to slow a little bit.
For 2019, the Fed expects to hike rates once more. Market expectations, however, have shifted significantly. The market now implies no interest hike in 2019.
If we do see the Fed hike, it could be taken negatively by risky assets, because there might be concerns that the Fed is going to make a policy mistake, tightening monetary policy still further even if they begin to see the economy slow down.
Uncertainty in the US has managed to knock Brexit off the front pages for a couple of weeks, but it’s still going to be a major event for the first quarter of this year.
As we stand here today, the probability of Mrs May getting her deal passed seems to have increased a little bit, but the range of outcomes is still very broad.
If we do see the deal passed, we’d expect financial markets to take that quite positively, as it removes some of the uncertainty that we’ve had to live with over the past few months.
Uncertainty in 2019
There’s a lot of uncertainty as we go into 2019, but the real focus for us should be around global growth. All of the issues that dominate the headlines, be it the US government shutdown, trade, Brexit, all of these have implications for global growth.
When we think about the drivers over the last couple of years, it’s really been the US and China, and both of those economies are showing signs of slowdown. So when we think about that, we need to consider the implications for corporate profitability, and corporate earnings. And then we also need to consider the policy responses you could see in the event that we do see these economies slow down more than expected.
From a portfolio perspective, it’s really about focussing on the long-term and also managing the risk in these portfolios as new information and new data comes to light. That’s really where we will be focussing our attention in 2019.