4Q 2019 market outlook in 3 charts
Yield can still be found in a low rate, low inflation and low yield environment.
We believe, global trade tensions aren’t likely to dissipate soon even as the US and China agreed on a truce over additional tariffs at the G20 summit in late June, and to resume negotiations. This is largely because:
In addition, global economic activities are slowing. US business activities edged closer to stagnation in June 20195 when the flash composite Purchasing Managers’ Index fell to 50.6, only fractionally above the neutral 50.0 threshold. Business and investment sentiments are vulnerable to the uncertainty caused by unpredictable trade policy. And the global economy maybe gliding into protectionist turbulence.
While economic storm clouds may be gathering, investors should be careful to avoid becoming so conservative that they miss out on investment opportunities. In our MAS team’s view, investors could tap multiple income sources to generate income and cushion risks.
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The primary risk is that US trade and tariffs are broadened to include other regions and countries, possibly Europe. Trade anxieties generally have an impact on business sentiment and spending. Already, manufacturing surveys have weakened around the world, with a notable decline in the US business surveys and continued weakness in China, Japan and Europe9. Germany’s manufacturing sector in particular, looks to be struggling. One risk is that this weakness in the manufacturing sector could lead to job cuts and falling consumer confidence.
Another risk is that central banks could be slow to respond with monetary easing. Central banks may consider they are better off waiting to see how things play out in geopolitics and then responding more aggressively.
Thus far, the near-term de-escalation of US-China trade tensions reduces the chances of a large (50 basis point) US rate cut, but does not obviate the need for a cut. The G20 outcome may reduce the European Central Bank’s sense of urgency about rate cuts, but in our opinion the current scenario – the US-China trade war is on hold and a pick-up in trade discussion between the US and Europe – isn’t enough of an upside catalyst for European growth.
The outcome of the trade conflict is almost impossible for markets to accurately price. Against this backdrop, investors could consider tapping more than one income-generating asset as a diversified income pool could be better placed to help generate a consistent stream of income sources, smooth price fluctuations and cushion portfolio risks.