In 2019, we forecast some new shifts in the relative macro environment about growth, inflation and policy. 2019 is a challenging year, and also the years which needs to make decisive turns.
What are the turning points?
There are two types of change in global macro environment. The first will be the confirmation that global growth is shifting lower, inflation is shifting higher and G4 central banks are committed to tightening policy. The relative macro story will be another key turning point for 2019. The US dollar trend will reflect the relation status between US and the rest of world. Overall, 2019 is a year to weak dollar. However, some geographic risk may push US dollar delay its bearish trend.
For the market, we see serval key reversals. First, the stronger dollar will face a cyclical peak. Second, the yield differentials between US and European will decrease. So, a shift in emerging market relative performance compared to developed market will be our third key point. We are worried about the high yield bond risk, because corporate leverage is high. The default rate is not reflecting the fundamental as economy growth is still strong. We also believe value can outperform growth in 2019.
Bad and good news
Growth across the developed markets and China is set to slow further in the first quarter of 2019. Tax reduction fade affect US economic growth in 2019. Based on the Morgan Stanley forecast, nominal GDP growth for BRIC and G4 could fall to 1.2% annual rate by the first quarter of next year.
Is there any good news ahead? Yes, we have a rolling bear market in multiple asset classes. In 2018, no one asset classes performance beats in US dollars over US headline inflation. However, their valuation becomes attractive. In 2008, a bear market but still four asset classes outperform inflation this year.
In conclusion, the lower valuation an asset is in 2018, the higher return of its will be in 2019. Assets at the bottom generally enjoy better valuation and benefit from the movement of global macro. We prefer MSCI China and Ems. US high yield bonds will face a repricing risk.