Economics Equities Fixed Income Presentation

Capital Markets Outlook

4Q:2019

October 10 2019
2 min read

What You Need to Know

In the third quarter, trade war and monetary policy dominated returns and expectations, causing risk assets to struggle. The most likely scenario for the global economy as we move forward is somewhere between a lengthy downturn and a “muddle-through” scenario. This has big implications for portfolio positioning.

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2.3%
Revised Global GDP Forecast for 2020
53% vs. 28%
Euro Area vs. US Trade Openness (exports and imports of goods and services as % of GDP)
-US$ 208B vs. +US$368B
Equity Outflows vs. Bond Inflows (YTD 2019)

For the most part, we’ve lowered our 2020 economic growth forecasts for most regions of the world, with the global economy in its later stages and big-picture risks like trade wars taking a toll. In the US, the consumer and labor markets remain strong, but we’re watching trade-war spillover carefully.

We’re monitoring two key questions: 1) Will manufacturing recover before weakness spreads to investment and jobs, which would drag down overall growth? 2) Will the policy response be big enough—and effective enough—to offset downward pressure on growth?

The current environment has important implications for the way investors shape their portfolios. In equities, volatility and mixed valuations call for a focus on profitability, quality and strong cash flows. In fixed income, investors should look for efficiency: using high yield to de-risk some of their equity exposure and considering a credit barbell for income and downside protection.

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