The year of the doves
With all major central banks now having turned dovish, we can expect the continuation of ultra-low global interest rates in 2019. This is a relief for markets, which have already rallied in response. The greater concern is whether global growth can make a comeback.
César Pérez Ruiz, Pictet Wealth Management’s (PWM) Head of Investments & CIO, will be looking for stabilisation in earnings revisions against the current backdrop of rich equity valuations. “For markets to continue to rally, we will need economic activity to bottom out and earnings revisions to stabilise in the second half of the year,” he writes in the April-May issue of Perspectives. “We see volatility in markets ahead until various resolutions have been reached, including around trade, Brexit, Venezuela and European parliamentary elections. In the meantime we will be taking profits in portfolios as opportunities present themselves.”
Turning to the macroeconomy and central bank policy, PWM’s Chief Strategist and Head of Asset Allocation & Macro Research, Christophe Donay, observes that “We are late in the economic cycle, yet interest rates remain low, meaning that central banks will have to become even more imaginative to tackle the next downturn.” Markets have been supported by the recent dovish shift among major central banks in 2019 so far and despite slowing global growth and ongoing geopolitical uncertainty, “we remain relatively upbeat about economic prospects, and we now expect that central banks, faced with the need to keep debt-laden markets and economies afloat, will keep the monetary spigots open in the months ahead, helping justify an expansion in earnings multiples even as earnings growth declines from last year’s high levels.“
In a Q&A, Frederik Ducrozet, PWM Strategist, expands upon the implications of current central bank policy, particularly in regard to the Fed’s dovish pivot at the beginning of the year. He discusses the remaining monetary policy levers that central banks have at their disposal to stimulate the economy if and when a recession arrives. “What is worrying about this situation is that if a recession were to threaten the European economy, it would be challenging for the ECB to respond, given the political and technical constraints it faces, while national governments and European institutions have few readily available stimulus levers,” he explains.
In a slightly more whimsical spirit, César Pérez Ruiz and PWM’s Head of CIO Office and Global Strategist, Alexandre Tavazzi, explore eight potential surprises in 2019 – from the UK populace electing to remain in the EU to climate change-driven food shortages – and the market consequences that would result.