As the global economy becomes less synchronised and more divergent, investors should aim to be more active and selective
The US economy will likely slow after the effects of President Trump’s tax cuts wear off, but a divided Congress may not significantly alter his economic policy; no US recession is expected yet
Concerns over Brexit and the direction of European politics may reduce confidence and fuel market uncertainty in Europe
China will keep transitioning its economy to one driven by consumption and services, but it may be hampered by trade frictions and the emerging “tech cold war” with the US
With QE mispricing many asset classes, diversification alone may not be sufficient; contrarian ideas and out-of-consensus themes may come into favour
Higher interest rates in the US – and less quantitative easing from the US Federal Reserve and European Central Bank – will likely reduce liquidity and create higher market volatility for investors in 2019. Because navigating the markets successfully may take greater skill, we believe investors should consider actively selecting where to invest, rather than passively accept market returns – understanding there is no guarantee that any type of strategy will outperform.
The global economy – which has been doing fairly well – is likely to become even less synchronised and more fragmented. This would continue a trend that began in earnest in 2018 as market returns turned negative. Trade tensions and political uncertainty are set to be primary drags on performance, while high oil prices and tight labour markets in the US, UK, Germany and Japan could heighten fears of rising rates and inflation.
In recent years, investors have been able to follow the herd as markets have risen, but continuing that approach now will likely destroy value rather than create it. As we enter into a period of lower cross-asset correlations, higher volatility and lower returns – particularly for equities – active asset allocation and active security selection is likely to become increasingly important.
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