Overview

A Better Deal

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We believe 2019 offers a better deal for investors for three key reasons:

Continued expansion in global growth and corporate profits. We believe US growth will moderate in 2019 while the slowdown outside of the US is now behind us. Many Emerging Markets economies remain in the early stages of recovery with room to run. In our view, the continued global expansion will underpin corporate earnings growth and support risk asset performance.
A low bar for positive surprises. Conditions heading into 2018 were hard to beat, resulting in a situation where most surprises were negative. That is not the case going into 2019. Macro expectations and asset prices have adjusted sharply lower, lowering the bar for positive surprises that could lift asset prices.
Attractive valuations. In our view, the significant shift in valuations in 2018 is overdone relative to both macro and corporate fundamentals. Investors concerns around the long cycle, trade tensions and populist politics will likely carry through to 2019, but we believe it is too soon to position for the end of the cycle and markets have already gone too far in pricing these risks.

Expansion Continues: Global Growth Remains Above Trend, Neill Nuttall

Expansion Continues: Global Growth Remains Above Trend Neill Nuttall

Navigating the Cycle: Pro-risk or de-risk?

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.

The late cycle environment may shape markets. Historically equity volatility picks up toward the end of the cycle and we think we saw the trough in late 2017. The next major market event on the historical template is a trough in credit spreads. We think it is too early to position for this but will be watching credit markets closely in 2019. There is also a historical correlation between US Treasury yield curve flattening or inversion and recession. But a decline in term premium may have changed this signal and so we think it is more important to focus on economic data.
The macro backdrop suggests it is too early to de-risk. Economic growth is slowing but still growing and the rise in core inflation is steady not speedy, while central bank tightening is gradual not rapid. Additionally, corporate profit margins are still expanding and financial imbalances pose idiosyncratic rather than systemic challenges. As such we think it is premature to de-risk and we remain pro-risk.
But it is not too early to improve the trade-off around any take-down of risk. We think risks around late-stage cycle traits, including contracting corporate profit margins, excessive central bank tightening and systemic financial imbalances, will rise as the year passes. To prepare for this, at the micro level we favour exposure to companies with strong pricing power and on the macro front we prefer early cycle economies.

GSAM Annual Investment Outlook

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