Investment outlook 2019: Europe caught in crossfireContributor Karen Ward
What exactly went wrong in 2018? Markets started the year full of optimism. The US economy delivered stellar performance, buoyed by tax cuts, which caused a surge in both growth and corporate earnings. The unemployment rate hit an almost 50-year low.
The upward drift in inflation was gradual, so there weren’t many surprises from the Fed, which hiked rates by 25 basis points per quarter. Global quantitative easing wound down, beginning a reversal of the great search for yield. This challenged fixed income across the board, but not dramatically so (see On the Minds of Investors – Should we worry about quantitative tightening?)
What proved considerably more disruptive in 2018 was US foreign policy. Undeterred by the threat of higher costs for US consumers and businesses, Washington ramped up trade tensions. It seems that there is considerable political appetite among the US electorate, and as a result both Republicans and Democrats, to reconsider US trading relationships, with China very much at the eye of the storm.
This trade aggression hit the Chinese economy at a point when growth was already slowing rapidly in response to tighter policy from Beijing. The emerging markets have thus endured the double whammy of slowing growth in China and rising borrowing costs as a result of higher US interest rates. Emerging market equities and debt took a significant hit in 2018.
Europe has been caught in the crossfire. Although early tensions between the US and EU over auto tariffs have dissipated for now, European demand has been battered by a downturn in global trade.
Returns “Trumped” by geopolitics
Asset class returns
% total return year to date in GBP
Key themes for 2019
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