Macro views

Change is in the air as the Fed, BOC and ECB pivot on policy

There is an old Chinese proverb that states, “When the winds of change blow, some people build walls and others build windmills.” In other words, some people embrace change while others fear it. I’ve come to the conclusion that the speed of the change has much to do with how a change is received. Just look at the past week, when we saw abrupt changes in the direction of the wind for central banks, followed by largely negative reactions.

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What trade-offs will the U.S. accept for a trade deal with China?

Two key risks – trade and central bank normalization – have had an outsized impact on global stocks for more than a year (sometimes positive and sometimes negative). This past week saw developments in each of these key issues.

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Populist, nationalist movements are on the rise: What could this mean for the global economy?

An informal Invesco poll of North American institutional investors recently revealed that geopolitical risk was a top concern for 2019. And they’re not the only ones worried: European Central Bank President Mario Draghi recently noted that the risks to the downside have increased, blaming, among other things, “the persistence of uncertainties related to geopolitical factors and the threat of protectionism…” In his annual letter to investors in January 2019, Seth Klarman of Baupost warned of the threat of geopolitical disruption: “Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this.”

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What lies beneath the Fed’s ‘about face’ on normalization?

Last week was momentous for one specific reason: The Federal Open Market Committee (FOMC) released minutes from its January meeting, which detailed the significant “about face” that the Federal Reserve (Fed) has made over the last few months. In my view, the FOMC’s insights, along with apparent progress in U.S.-China trade talks, could enable stocks to move higher in the short term – but I’m also wary of negative implications that could lie beneath the surface.

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European uncertainty has lowered the price tag for quality stocks

The fourth quarter of 2018 was tough on investors in European equities, and uncertainty appears to be rising as we enter 2019. But the Invesco International and Global Growth team believes that environments like these can result in great prices for attractive businesses. In fact, we haven’t seen valuations in Europe this low since 2013. So, what is our outlook for Europe, and where are we finding opportunity?

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Five issues to watch this week

From key data releases to international tensions, there are five issues that I’m watching closely this week. Before I detail those, let’s review what we’ve learned in recent days that could impact markets going forward:

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Five ‘swords of Damocles’ hang over markets

In Greek mythology, the “sword of Damocles” is a powerful morality tale. King Dionysius is a leader who grows weary of a young sycophant, Damocles, who is constantly extolling the benefits of being king. To teach Damocles a lesson about the pressure and insecurity that comes with leadership, Dionysius allows him to sit on the throne for a day – but over the throne, the king has suspended a large sword, hung by a single hair. Damocles quickly learned what it feels like to be a leader who exists in imminent danger and jeopardy.

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The Fed changes its game plan

The biggest American football game of the year was played last night, and for the first three quarters, it looked as if both teams forgot how to score a touchdown. But great teams find a way to win, even when their tried-and-true game plan seems to be faltering.

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Global markets: Eight issues to watch this week

Last week was momentous as experts in Davos warned about the dangers of debt, more signs of a European slowdown emerged and the longest government shutdown in U.S. history came to an end. In today’s blog, I discuss what we learned last week – and highlight eight things to watch during the final week of January.

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Markets grapple with government dysfunction

Last week saw government dysfunction on full display in several different countries. While politicians in the U.K. and U.S. continued to make headlines, expectations for lower economic growth emerged in a report from the International Monetary Fund.

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What’s next for Brexit?

On Tuesday, Parliament rejected U.K. Prime Minister Theresa May’s Brexit Withdrawal Bill by a 230-vote margin – the largest defeat of legislation in nearly 250 years, when Parliamentary records began.^† That the defeat exceeded consensus by as much as 100 votes reflects the depth and breadth of dissatisfaction with May’s Brexit plan. Many Members of Parliament (MPs) fear it could further undermine the economy, contribute to secession in Northern Ireland or Scotland, or might not confer the freedom for which Brexiters campaigned in the referendum.

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Investor sentiment stays positive despite geopolitical drama

There has been no shortage of drama across the macroeconomic and geopolitical landscape so far in 2019. However, it appears that investors may be tuning out much of the political theatre around them. Which storylines are moving markets now, and which may become more integral to the plot in the weeks ahead?

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Is a real winner possible in the U.S.-China trade war?

Students of history may recall the War of the Roses, which was waged more than 500 years ago. It was an epic battle between two rival branches of the English royal family that both had claims to England’s throne – the House of Lancaster, represented by a red rose, and the House of York, represented by a white rose. While the House of Lancaster ultimately won the War of the Roses, by some measures there was no real winner. The war lasted for many years and resulted in very significant damage to both houses. In fact, by the end of the war, the male lines in both houses had been eliminated.

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No holiday in sight for global disruption

At the start of 2018, I warned about two significant forms of disruption that posed risks to markets: geopolitical disruption and monetary policy disruption. The solution to the global financial crisis – experimental monetary policy – had created greater wealth inequality, which had led to geopolitical disruption, and the situation was poised to worsen in 2018. This experimental monetary policy, especially large-scale asset purchases, was beginning to be unwound – and that was an experiment in and of itself which also had the potential to cause disruption.

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Three themes we’re watching in 2019, and their implications for institutional investors

As we look toward the opportunities and challenges to come in 2019, our base case is positive, with the expectation that global economic growth is likely to decelerate modestly, yet remain solid. We expect major economies to slow from above-trend growth toward on-trend growth, which should contain inflation, as major central banks normalize policy.

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Fixed income: Gauging the ripple effects of softening economic growth

Key takeaways

• In the US, we believe peak levels of growth are behind us and expect to see slowing in the second half of 2019.
• Outside the US, there are also signs of softening growth.
• Inflation is likely to increase somewhat, but we do not believe that wage inflation will be significantly passed through to consumer prices in 2019.

Global macro

In the US, we believe peak levels of growth are behind us, although we expect annual growth of around 2.75% to persist through the first half of 2019 before slowing.  Fiscal stimulus is still having a positive effect on growth, but will likely wane in the second half of 2019.  In addition, the positive financial tailwinds that have been driving the economy may turn more neutral as monetary policy continues to tighten.  Therefore, while consumer spending will likely be additive to growth in the first half, as the boost from tax cuts winds down, the question is how much will the consumer want to spend thereafter? Consumption has grown at an unsustainably high level, in our view, over the last several quarters, driven by stronger consumer confidence and tax cuts. A meaningful slowdown in consumption could have negative implications for broader growth.  These effects mean that risks to economic growth are higher in late 2019 than they have been in previous points in the cycle.

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International growth equities: A supportive outlook for international earnings

Key takeaways

• Despite the soft patch in certain macro indicators, there is a broad expectation that most major regions may deliver solid earnings growth in 2019.
• We believe equity valuations remain vulnerable to higher bond yields and discount rates.
• Trade and geopolitical tensions are the primary threats to the growth outlook.

As 2018 draws to a close, strong US corporate cash flow has been well-supported by tax cuts and increasing fiscal spending. This may continue to underpin reasonably healthy capital expenditures and support economic growth and earnings delivery in the US — but the big question is, will growth pick up around the world?

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U.S. growth equities: Change is the fuel for growth

Key takeaways

• If historical precedent holds up, there is still room to be positive on equities as we move into 2019 and on to early 2020.
• The key is to identify companies that can gain market share from technology-enabled advantages in their business model or disruptive shifts in consumer behavior.
• We highlight several areas where technology is enabling disruption and creating opportunities.

As we look forward into 2019, we believe there is continued potential for positive US equity returns, but slowing economic growth may mean more frequent downhills — and more investors losing their way — than during the market’s climb of recent years.  Observing the weight of the evidence, we have moved into a late-cycle environment.  In our view, the path forward will not rely on choosing growth versus value, or small-cap versus large-cap. We believe it will rely on identifying “share-takers” (companies that can gain market share from technology-enabled advantages in their business model and in consumer behavior) and avoiding “share-losers” (companies that have simply been buoyed in recent years by the expanding economic environment).

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Exchange-traded funds: Strategies for mitigating the new risks of the new year

Key Takeaways

• We see new risks on the horizon for both equity and fixed income investors, but there are various exchange-traded fund strategies that we believe can help.
• We expect that a loss of profit momentum in 2019 could lead to increased volatility and correlations, and we believe that the Low Volatility and Quality factors may perform relatively well in such an environment.
• With the overall climate still tilting in the direction of higher rates in 2019, one way to potentially manage that risk is to build bond ladders using defined-maturity bond funds.

In the new year, we see new risks on the horizon for both equity and fixed income investors. Equity markets are anticipating a loss of momentum for corporate profit growth. And, for the first time in 12 years, fixed income investors are forced to wrestle with the challenge of navigating a multi-year upward trend in interest rates at both the short and long end of the bond universe. There are various exchange-traded fund strategies that we believe can help with both challenges.

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Solutions: Heading into an uncertain 2019, diversification must be top-of-mind

Key takeaways

• The road ahead is expected to be challenging due to a variety of factors: rising global interest rates, increased volatility, diverging global monetary policies, and heightened geopolitical tensions around trade and tariffs.
• Our forecasts for returns are tepid across the major asset classes.
• There remain pockets of opportunities within asset classes.

Heading into 2019, the market’s resiliency is likely to be tested by evolving geopolitical tensions and questions regarding the ability of a late stage economy to grow. Volatility is expected to remain elevated as the markets seek additional support for increasing asset prices beyond continued earnings growth and the perceived positive impact of tax cuts. However, the road ahead will likely be more challenging to navigate. While the economy, as measured by gross domestic product, continues to expand, and US equities are experiencing their second largest expansion in recent history, there are numerous challenges for investors to navigate going forward, including:

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