2019 Investment Outlook
2019 Investment Outlook
A Better Deal
Reading Time: 3:20 minutes
We believe 2019 offers a better deal for investors for three key reasons:
Expansion Continues: Global Growth Remains Above Trend, Neill Nuttall
We believe it is too soon to de-risk
2019 will likely see increased focus on the end of the cycle. We think clearer signs of deterioration are required before de-risking. We do not expect to see those signs in the first half of 2019, though risks will rise as the year progresses.
We prefer equity over credit, and credit over rates as we think the global expansion will continue. We prefer EM relative to Developed Markets.
2018 Outlook 2019 Outlook
Less Attractive More Attractive
Equity
US Equity
Less Attractive More Attractive
European Equity
Less Attractive More Attractive
Japanese Equity
Less Attractive More Attractive
Emerging Market Equity
Less Attractive More Attractive
Equities are our preferred asset class. The continued expansion will underpin corporate earnings and in turn equity performance. We think the 2019 risk-reward for equities has improved relative to 2018 after the de-rating in valuation multiples. Regionally, we prefer EM over DM. Among DM equities, we think the US and Japan markets are better positioned compared with Europe, where political uncertainties and recent euro appreciation will serve as headwinds.
Fixed Income
Emerging Market Debt Local
Less Attractive More Attractive
Investment Grade Corporate Bonds
Less Attractive More Attractive
High Yield Corporate Bonds
Less Attractive More Attractive
US Government Fixed Income
Less Attractive More Attractive
Tactically constructive on credit. Ongoing macro growth will elongate the healthy corporate environment of strong earnings and benign downgrade and default activity, making it too early to position for significant widening in credit spreads. Recent weakness provides an attractive opening to add tactical exposure in light of strong fundamentals.
Bearish front-end rates. We believe the market is underpricing the pace of near-term Fed hikes. We therefore remain bearish front-end US rates, and we expect to observe rate volatility as market-implied pricing adjusts. Beyond this core scenario, we see a tail risk around the market requiring a higher risk premium to reflect the large US fiscal deficit, potential for a higher Fed inflation target or the global QE unwind.
Real Assets
Commodities
Less Attractive More Attractive
Public Real Estate
Less Attractive More Attractive
Public Infrastructure
Less Attractive More Attractive
Oil prices bounded by OPEC cuts and consumer nation pressures. We expect oil prices to be range-bound with WTI trading between $50-70 per barrel. Demand and OPEC supply cuts will likely provide support to the range from the downside, while political pressure from consumer nations will limit the upside.
Currency
US Dollar
Less Attractive More Attractive
Euro
Less Attractive More Attractive
Japanese Yen
Less Attractive More Attractive
Chinese Renminbi
Less Attractive More Attractive
Soft US dollar and stronger EM currencies. As the global growth landscape rebalances away from US exceptionalism, we expect a softening of the dollar and some of the valuation potential in EM currencies to be released. Fed hikes should be supportive for the dollar, but we do not think they will be sufficient to offset the pressures from the changes in growth.
Source: GSAM as December 2018.
We expect three Federal Reserve Bank rate hikes in 2019 but risks to our view are balanced.
The Fed has been steadily tightening monetary policy for two years. A key question for investors—and a key consideration for risk assets in 2019—is whether that gradual tightening continues.
Financial conditions are responding to Fed hikes
Source: Macrobond, GSAM. As of November 12, 2018.
We believe valuations are attractive relative to fundamentals
We prefer equity over credit, and credit over rates, and regionally, EM to DM. These preferences are based on attractive valuations relative to macro and corporate fundamentals.
Valuations are more attractive after broad weakness in 2018
Source: Haver Analytics, Datastream, Bloomberg, I/B/E/S, GSAM. As of November 2018
December 2018