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Q4 2018 market outlook: Embrace the uncertainty and trust the wait


qFourMarket

As we close in on the end of “crazy” 2018, it didn’t seem too long ago that we felt the good global growth momentum of 2017. Yet this year felt like we were on a roller coaster ride from the thrashing of emerging markets (EM), escalation of the US-China trade war tensions to the Federal Reserve tightening and rising oil prices. These factors including the final stretch of Brexit negotiations are likely to continue driving the financial markets for the last quarter of this year. Not forgetting the US mid-term elections as a potential shift in power could determine the strength of Trump’s senate and impact the trade war1.

We saw three rate hikes by the Fed this year with the latest rate increase in September to a range of 2% to 2.25%2 and central bankers are expecting for a fourth rate hike in December. In 2019, Fed officials expect at least three rate hikes will be necessary, and one more in 20202. This would take the rate up to 3.3% as forecasted by experts3.

So where do we go from here and how should investors tweak their portfolio as bearish sentiments start weighing in? Some investors may felt that gains from last year have been wiped out but that doesn’t mean we’re heading to a recession or a bear market.

We consolidate some global market views4 below:

US market: Strong economic growth, earnings growth and market performance. High bar is set for further positive surprises.
Eurozone: Euro-area equities look fairly valued and economy is likely to beat low expectations, while earnings forecasts have potential for upside revision.
Asia Pacific: Cautiously optimistic outlook through 2019 with fundamentals remaining decent. Escalation of US-China trade war remains a key risk.
Currencies5: US dollar strength is fading and exposed vulnerabilities in some emerging markets. Upside for the dollar looks limited given its expensive valuation and crowded long positions.

With these global market forces dominating the headlines and the trade war still clouding over us, what other opportunities could lie out there? Turning back the lens to Asia, there might be some value in Asia as Chinese equities now look affordable6 and long-term investors can consider some opportunities with it. The CSI 300 went down 22% in local currency terms from year to date. With earnings per share forecasted to grow at an average of 12.9% over the next three years6, a continuous decline in Chinese equities would seem unlikely. Expect to find Chinese market long-term opportunities within consumer-centric industries, healthcare, environmental services, e-commerce, and technology.

For your investments, the golden rule of portfolio resilience and diversification across asset classes is still a solid strategy. Investors should maintain a balanced portfolio of fixed income and equities as now is not the time to be aggressive nor defensive. Another way to curb volatility could be through multi-asset funds and maintaining a low-volatility strategy. Investors should also wait out for more clarity3 on trade talks, the Fed and China stimulus before making the plunge back into emerging markets, for instance.

So continue staying invested for the long-term as the worse thing to do now is to sell off at a low and buy back on a high when the prices bounce back. Lastly, avoid making the easy mistake of timing the market.

Time in the market beats timing the market.


Sources:

1) https://www.fxstreet.com/analysis/quarterly-market-outlook-2018-q4-201810010818
2) https://money.cnn.com/2018/09/26/news/economy/federal-reserve-interest-rates-hike/index.html
3) http://blog.russellinvestments.com/2018-global-market-outlook-q4-update/
4) https://russellinvestments.com/ca/global-market-outlook
5) https://russellinvestments.com/ca/global-market-outlook/currencies
6) https://www.home.saxo/-/media/documents/quarterly-outlook/q4full-report-2018.pdf?la=en-sg



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