Second Half 2019 Investment Outlook:
Decelerating growth, but growth nonetheless
Market Snapshot
Overview
The first half of 2019 left investors with a mixed bag of emotions. Up until the beginning of May this year, financial markets across the globe were rallying on positive sentiments from the hopes of a trade war resolution between the world's two largest economies, as well as the indication of a halt in interest rate hike by the US Federal Reserve – downplaying the sharp correction in the last quarter of 2018. The S&P 500 also, for the first time, registered its all-time-high of 2,954.13 in the first week of May while the Shanghai Shenzhen CSI 300 index also reached its 52-week high of 4,126.09 that very same week.
How everything changed, with a mere tweet from President Trump on May 5th.
Sell in May and go away?
While one may be tempted to relate the current state of financial markets to the famous adage of “Sell in May & go away”1, it is worthy to note that recent studies have shown that a weak May normally heralds a more robust June–August period and that the strategy of holding stocks year-round emerges superior2.
With increasing chatter on the streets about an impending recession if trade tensions do not abate, how should you, as an investor, position your portfolio for the Second Half of 2019?
Here we take a closer look at major markets across the globe:
United States
The US economy grew 3.1% in 2019 Q1, in line with estimates, but is expected to fall to 2.4% by the end of Q2 and 1.8% in 20203. The ISM Manufacturing PMI in the US fell to 52.1 in May 2019 from 52.8 in April, below market expectations of 53 and the latest reading pointed to the weakest growth in factory activity since October 2016, amid a slower increase in new orders, production and employment.
As trade tension between US and China continues to escalate, hopes of a deal at the G20 summit in Osaka have been dashed, with the most likely scenario being a prolonged battle. Investors have been rushing for safe assets and the 10–Year US Treasury Yield fell to as low as 2.121 percent.
Fed funds rate futures are now almost pricing in two rate cuts this year, one in July and another in September, and major banks such as JPMorgan also expects the Fed to cut rates twice this year to counter economic risks and prevent it from slipping into recession.4
Eurozone
Unsustainably high levels of debt
European Central Banker Mario Draghi vowed to “do whatever it takes” to provide liquidity for the Eurozone to overcome unsustainable levels of debt in the peripheral countries. Yet, seven years on, several peripheral countries remained mired in a prolonged crisis. These countries either need interest rates to remain at or below current levels for a sustained period to stabilize their debt to GDP ratios, or must generate historically unachievable primary surpluses. Italy, for example, can only stabilize its debt level at 154% of GDP if interest rates remain below current levels of 2.5%.
The Eurozone has suffered a significant contraction in its labour force since the 2008 Global Financial Crisis, prompting a decline in the rate of investment to GDP. While an influx of migrant labour has helped to counter demographic headwinds affecting the labour force, relief is expected to be temporary given the political unpalatability of open border policies in Europe.
Eurozone wage growth vs labour force growth
Source: Eastspring
UK
End of May, but uncertainty still looms.
The end of May marks the emotional resignation of British Prime Minister Theresa May after three years in office. As she succumbs to political pressures and failed to deliver Brexit, it is uncertain who the next Prime Minister of Britain will be and what policy stance will he or she take.5
Germany
Germany saw its benchmark 10–year bond yield fall to record lows after US President Donald Trump announced tariffs on Mexico on all goods entering the US. The HIS Markit's Purchasing Managers' Index (PMI) for manufacturing, which accounts for about a fifth of the economy, fell to 44.3 in May, close to its lowest level since 2012 and car sales have been impacted by slowing worldwide demand and delays caused by new emissions testing.
Beijing is the most important trading partner to Berlin outside the European Union, reflecting its sensitivity to any developments in US-China bilateral relations.6
Italy
Italy faces disciplinary actions from EU after Rome recorded public debt of 132.2% of GDP last year, up from 131.4% in 2017, the highest in the EU after Greece. Italy's debt is also set to expand in 2019 and 2020, according to the EU Commission's forecasts, and could face financial sanctions and a stricter oversight of the country's fiscal policy.7
Long term outlook
Over a longer-term investment horizon, Europe needs meaningful fiscal stimulus – which contradicts the Eurozone policy prescription of restoring imbalances through austerity – for growth and inflation to fully recover. Even then, demographics are accelerating the phenomenon of a shrinking workforce, lower wages, and disinflation, ensuring that interest rates remain at low, or even negative levels.
Over the coming decades, therefore, the outlook for European equities is likely to remain depressed, occasionally punctuated by aggressive counter trend rallies that subsequently fail to be supported by improving fundamentals. Longer term investors may want to look to Asia instead.
8
Asia
China
The intensification of the US-China trade war in recent weeks has provided the catalyst for a significant pullback in global emerging markets. A combination of monetary and fiscal policy easing has resulted in a more stable environment, compared to the focus on deleveraging policies in 2018 which created a credit squeeze and a period of bumpy economic deceleration.
On fundamentals, net profit growth for listed Chinese companies (across A, H and US listed ADRs) rebounded 11% yoy in 1Q2019, and street consensus for 2019 full year earnings growth is still double digit for both onshore and offshore Chinese equities.
With earnings still being resilient, the market pullback has effectively led to lower valuations. The price/book ratio of MSCI China A-Shares now stands at 1.68%, meaningfully lower than the 10-year average of 2.2x and signals a good entry point for longer term investors.
Another positive catalyst for Chinese equities is the increase in weightage of China A–Shares in the MSCI Emerging Market Index, which will effectively double from 5% to 10% from 28th May 2019 and further rise to 20% in November 2019, by which time China A–Shares should account for 3.3% in MSCI Emerging Market Index.
However, this is just the beginning of a much longer term story. China A–Shares have the potential to ultimately become close to 30% of the MSCI EM Index, as suggested by the pro–forma analysis below.
India
Modi's Bharatiya Janata Party (BJP) has once again emerged victorious in India's 2019 national elections, with an even bigger majority (324 seats) than what it achieved in 2014. This better-than-expected outcome will be taken as proof that Modi's popularity continues to work, and markets have reacted favourably.
BJP's 2019 election manifesto suggests the next 5 years will be dedicated to fulfilling and furthering its 2014 promises. This term suggests that the electorate is convinced that the government should be given another term to complete the agenda that they set out earlier.
Indian equities in general have been in the expensive territory for some time now and Indian corporates are in a much better position, having deleveraged over the past decade. Earnings estimates are also fully priced into the market and valuations compared to history and other emerging markets are at a premium now. The market remains vulnerable to earnings disappointment.9
Indonesia
South East Asia's largest economy performed fairly well in the first quarter of 2019, despite growth slightly undershooting market expectations. Private consumption was likely supported by a multi–decade low unemployment rate and mild inflation, while public consumption appeared to receive a boost from pre–election spending. In the second quarter, available indicators are fairly downbeat while the external sector recorded a record trade deficit as exports continue to plunge.
On the political front, incumbent Joko Widodo emerged victorious in the 17 April presidential election which signaled policy continuity.
Growth is expected to be firm this year, supported by healthy consumption and investment, but there might be downside risk from global trade tensions, performance of the rupiah and possible delays to infrastructure projects.
The Indonesian economy is expected to grow at 5.1% in 2019 and 5.2% in 2020.10
Thailand
In general elections held on 24 March, the military–backed incumbent Palang Pracharat party fell short of securing a majority in the Lower House but managed to re–elect Prayut Chan–o–cha as Prime Minister. Economic growth will likely moderate this year while increased government spending related to infrastructure projects will likely provide some stimulus. Downside risks from lingering trade tensions between US and China may affect exports while high household debt is likely to drag on consumption.
The Thai economy is expected to grow at 3.6% in 2019 and a slighted muted 3.5% in 2020.10
Vietnam
The outlook for the Vietnamese economy in 2019 remains favourable, with household spending expected to be brisk amid modest inflation and rising incomes. Stronger tourism, FDI, exports and industrial output should continue to power growth. The possibility of a larger–than–expected Chinese or global slowdown pose downside risks.
GDP is expected to grow at 6.6% in 2019 and 6.4% in 2020.10
Singapore
Growth in the lion city continued to remain soft in Q2 after recording the worst year–on–year output in nearly a decade. Overall growth in 2019 will likely be softer than last year, due to lower demand for technology products, amid the US–China trade war and slowing Chinese growth. Increased fiscal spending, stronger construction activity and consumer spending will support the economy.11
Against the equity market volatility, investors might want to consider Singapore dollar (SGD) bonds which could play a key role in stabilizing investors' portfolios, while providing an attractive level of income.
Singapore dollar bonds delivered more stable returns
Source: Eastspring
The negative correlation between the SGD bond and Singapore equity markets implies that SGD bonds can play an important role in stabilizing investors' portfolios over the medium to long term.
Uncertainties surrounding the US–China trade talks are likely to weigh on equity markets and keep volatility elevated. Within the SGD bond universe, corporate bonds are favoured for their higher carry and valuations will likely be supported by strong structural demand, especially from the insurance industry.12
Singapore's insurance industry has substantial investment in debt securities
Source: Eastspring
Commodities
Oil
Amid a global economic slowdown, oil prices have dropped almost 20% from their 2018 peak as global supplies tightened due to output curbs by OPEC+, as well as a drop in Iranian exports due to U.S sanctions and Venezuelan production.
Despite OPEC+ giving assurances that they would continue to manage global crude supplies to avoid a surplus, the tight supply focus is switching to increased risk of lower growth and demand as well as an escalation of the US–China trade war.
Bank of America Merrill Lynch projects Brent and WTI will average $70 per barrel and $59 per barrel respectively in 2019, and $65 and $60 per barrel in 2020.13
Gold
Spot gold rises to its six–month high as fears of a global economic slowdown support the safe–haven demand for bullion, with a weaker dollar adding further support14. Gold bulls seem to have set their sights on $1,350 per ounce which has been the key resistance level in the past 5 years. Any significant breach beyond this level might signal a more sanguine outlook for the world economy.
Spot Gold
Source: Bloomberg
With these market insights in mind, you can start to compare and search for the funds that you need with our intuitive fund finder on dollarDEX.
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1.https://www.investopedia.com/terms/s/sell-in-may-and-go-away.asp
2.https://www.investopedia.com/news/truth-about-sell-may-and-go-away/
3.https://tradingeconomics.com/united-states/gdp-growth
5.https://www.theguardian.com/politics/2019/may/26/end-game-fall-of-theresa-may
9.https://www.eastspring.com/insights/modis-bjp-secures-another-historic-win
10.https://www.focus-economics.com/countries/indonesia
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Information is correct as of 17/06/2019.