After a volatile and difficult year in 2018, Alphinity Investment Management portfolio manager Jeff Thomson expects more of the same in 2019.
“The cumulative impact of a stronger dollar, fading fiscal stimulus, rate hikes and the ongoing Fed balance sheet reduction have together tightened financial conditions and will likely continue to slow global growth over the year ahead,” he said.
Mr Thomson noted that it remains to be seen whether this is merely a return to more normalised levels of growth, or something more severe.
“The US economy is late-cycle and so recessionary risks are rising, but a lot will also depend on how various more unpredictable tail-risks play out, including China trade talks, Italian budgetary tensions and Brexit,” he said.
“Regardless of whether we enter economic recession next year, the outlook for equity markets is likely to remain challenging.”
Consensus earnings estimates appear too optimistic about revenue growth and too sanguine about the ability to pass on cost pressures, Mr Thomson noted.
He added that the unwinding of the Fed’s enormous $4 trillion balance sheet will also continue to deflate the global credit bubble created by post-crisis quantitative easing, pressuring prices across all asset classes.
“Within global equities, slowing growth means it is too early to buy cyclical value, but we are also wary about expensive growth stocks, especially within the US which have been significant beneficiaries of the ultra-low rates and easy money,” Mr Thomson said.
“We continue to concentrate our portfolio in a diversified range of high-quality businesses with pricing power, where we have conviction that the market is underappreciating the earnings outlook.”
