Insights

Emerging markets (EM) slid from February through the year-end on the back of a stronger dollar, an escalating trade war and notably weaker growth in China. However, we see evidence that these previous headwinds may now be turning into tailwinds.

The Japanese equity market fell in December, with the TOPIX (w/dividends) dropping 10.21% on-month and the Nikkei 225 (w/dividends) declining 10.28%.

It is a design fault amongst perhaps the majority of economists that, when things don’t quite go according to their forecasts, they will either ‘blame the data’ and stick to their previous view for too long, or attempt to finesse a ‘U-turn’ in such a way that it does not look like one so as not to undermine their short-term credibility….

Global growth is expected to grind lower in 2019, with continued monetary policy normalization in developed markets being the key headwind for the world economy. Financial conditions will tighten further as the Fed continues its gradual increase in interest rates.

In December, US Treasury (UST) yields fell as risk assets came under pressure from various factors, triggering ‘safe-haven’ buying.

The return of negative bond/equity correlations was a rare silver lining for multi-asset investors in 2018.

The MSCI AC Asia ex Japan (AxJ) Index fell by 2.6% in USD terms in December, as concerns about slowing global growth, tightening monetary policy and rising geopolitical tensions continued to drive sentiment.

The S&P/ASX 200 Accumulation Index returned -0.1% during December.

The Australian bond market (as measured by the Bloomberg AusBond Composite 0+ Yr Index) was up 1.50% over the month, outperforming Australian equities which fell 0.12%.

At present, our working hypothesis for 2019 is that, following a potentially quite bright start to the year as the US approaches its ‘peak fiscal stimulus’ and the Administration runs down some of its savings deposit holdings at the Federal Reserve (for reasons connected with the Debt Ceiling), global liquidity conditions and in particular dollar liquidity conditions are likely to tighten quite significantly – and possibly severely – during the second quarter.