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Market Outlook - Monthly

February 2019 (covering January 2019)


  • The US equity market posted its best month in three years in January on the back of less aggressive US Federal Reserve (Fed) comments and optimism over US-China trade talk.
  • We have trimmed our exposure in view of trade tension uncertainty and how the political tug of war with China will unfold. The yoy earning tailwind from Trump’s tax reform will fade in 2019, and tighter liquidity condition from ongoing interest rate normalization.

Europe (including UK)

  • European and UK equity markets rose in January. All areas of the market, apart form communication services, posted positive returns with the best performing sectors being real estate, consumer discretionary and Information technology.
  • We concern that QE may come to an end as the European Central Bank (ECB) sees early signs of recovery.

Asia Pacific (ex Hong Kong ex China ex Japan)

  • Asian equities reversed year-end declines to close higher in January. Investor sentiment was buoyed by the Federal Reserve’s (Fed) decision to leave interest rates unchanged and the diffusion of tensions surrounding the US-China trade talks.
  • Asian markets may regain favor from international investors in 2019. We believe Asian equities are trading at attractive valuation, offering a good entry point for long-term investors.

Hong Kong and Mainland China (H-shares)

  • Offshore Chinese equities was the best performing market in Asia. It registered a strong return. Upbeat sentiments towards emerging market equities boosted by the Fed’s dovish comments, easing trade tension and improved economic data provide favorable tailwinds.
  • We believe the Chinese economy is on a sustainable path now towards high quality growth and will continue to rebalance away from traditional growth drivers into new growth drivers of consumption and services. In Hong Kong, private consumption growth has been strong this year and we expect it to remain well supported by a healthy labor market.


  • Japanese equities lagged over January as weaker Chinese growth and US-China trade disruption saw a drop in December exports. Factory output was also lower in December, down 0.1% month-on month– the seventh monthly drop in nine months – which weighed further on investor confidence.
  • We believe the near-term business cycle remained subdued because of unfavorable corporate earnings. Corporate governance reform continues to progress slowly but improvements in capital efficiency and profitability. 

Fixed Income

  • Corporate bond markets had a positive start to 2019, while European currency high yield corporate bonds had their best January since 2012. Given the market’s attraction towards riskier assets, government bonds were generally weaker, with both Bunds and Treasuries delivering negative returns. 
  • The 10Y UST yield has levelled off meaningfully from the 3% threshold following expectation that Fed will pause its rates normalization action in 1H 2019. We see limited value in government bonds after years of prolonged rally.

Emerging Markets

  • Global emerging equity markets enjoyed a strong start to the year with all regions registering gains. Latin America led the advance, followed by EMEA (Europe, Middle East and Africa). Asia also performed well with market sentiment towards China bolstered by the diffusion of tensions surrounding the US-Sino trade talks. 
  • We believe global growth differential will favor Emerging Markets. Even as valuations have adjusted, the market is monitoring tightening financial conditions via higher US rates and stronger USD while paying less credence to supportive Emerging Markets fundamentals.

2019 Investment Outlook : 15 asset classes

Each New Year brings the promise of a fresh start-but for investors, it’s important to understand the global dynamics that have brought us to this point. How do yesterday’s elections, monetary policy decisions and geopolitical developments affect tomorrow’s opportunities? Working with our investment teams from across the globe, we've developed this 2019 outlook to provide insights that can help you position your portfolio for the future.

2019 Outlook - Global Economy “Global economy expected to grow with low inflation in 2019”

Key takeaways

  • 2018 has been a year of turmoil, but, 2019 promises to be much calmer, in my view.
  • I believe the Federal Reserve should be successful in positioning the US economy for several more years of expansion.
  • Monetary policy invariably dominates fiscal policy in the determination of inflation.

2019 Outlook - Global Markets “Three themes to watch in 2019”

Key takeaways

  • We believe economic growth divergence is likely to continue to some extent.
  • Geopolitical disruption is leading to structural fragmentation.
  • The debt problem is widespread and is becoming more burden some as rates rise.

Focus on Asia – The Impact of Trade Tensions on the Region

Oct 25, 2018

Q1) Trade tension between the US and China has already played out for more than 6 months, what are the observable impacts so far in the Asia region / Asian countries?
Dr Greenwood: So far the US has imposed tariffs on US$ 235 billion of Chinese imports coming into the US. This amounts to 44% of Chinese exports to the US, and 8% of total US imports in 2017. The impact on the US so far has been small, in part because the US$ has strengthened (lowering import prices), but the impact will surely intensify. For example, although the prices of all US imports from China had increased by only 0.4% in September, overall import prices had risen by 4.0% in July, while spot industrial metal prices have declined by 4% over the past year.

Nevertheless, the imposition of tariffs is bad news for the US consumer. In January the Trump administration imposed a 20% tariff on imported laundry equipment (such as washing machines) until a quota of 1.2 million per year was reached, and then 50% after that. The result was that in the three months April to June, US laundry equipment prices within the US CPI increased by 19.9% -- by far the largest monthly price increase of any of the 300 individual CPI categories or sub-categories -- and domestic makers like Whirlpool have been able to raise their prices.

On the Asian side the observable results in the published data are very small to non-existent, but the PMI measure for new export orders – an indicator of future trade volumes -- fell to its lowest level in two years.

China’s total exports increased by 14.5% year-on-year to US$ 226.7 billion in September 2018, after a 9.8% rise in July, defying market expectations of a slowdown. It was the fastest growth in outbound shipments since February, though some might be due to front-loading of exports to the US before tariffs are raised to 25%. Despite intense trade tensions with the US, strengthening global demand and a lower yuan have helped fuel a record Chinese trade surplus with the US of $34.1 billion in September. In addition, raw aluminium and aluminium product exports surged 37% year-on-year to 507,000 tonnes despite the 25% tariffs on Chinese steel imports and 10% on aluminium imports since March 23rd.

Two things are already clear: first, the makers of the targeted goods are looking for alternative places to do the manufacturing of the lower value-added items. Thus Vietnam has benefitted from the transfer of numerous garment makers from China. Second, the tariffs will encourage China to shift more rapidly into higher value-added activities where profit margins are higher. This is what happened in Japan when the US imposed quotas and other restrictions on Japanese goods coming into the US in the 1970s and 1980s.

Q2) CNY/CNH has been one of the worst performing Asian currencies in the region in the past 6 months. In your opinion, how would this impact on other countries in the region? What is your outlook on Asian currencies?
Dr Greenwood: All the Asian economies have been affected by rising US interest rates and the strengthening US dollar, but the CNY has been additionally affected by the imposition of tariffs on the country’s exports to the US. In my view the US dollar will likely strengthen further against Asian currencies while US interest rates are being raised, but will then stabilize – probably in mid or late 2019. However, the recent US Treasury report on “currency manipulation”, while not labelling China a “currency manipulator” makes it clear that the US government will not tolerate much more CNY depreciation, so it seems unlikely that the CNY will depreciate much more against other Asian currencies.

The impact of currency change is only one of the factors driving export and import growth. Changes in the volume of demand in the target markets are equally important. Normally it takes up to two years for these price (or currency depreciation) effects and volume effects to be fully reflected in exports and imports. It is therefore too early to see the full consequences of the recent currency changes. Meantime, while China has done better than other Asian exporters in 2018, the steady strengthening of global activity has helped non-China Asian exports recover modestly over the past year.

Q3) Recently, China has taken certain actions in terms of monetary policy, e.g. cut RRR and weaken its currencies. What is your outlook on the People’s Bank of China (PBOC) monetary policy going forward and how will that impact on the economy?
Dr Greenwood: In my view China’s priority remains the deleveraging of the economy due to the build-up of excessive debt since 2008-09. This has meant that M2 growth, bank lending growth and total social financing have all slowed down since the start of 2017. For example, outstanding total social financing increased only 10.6% in September from a year earlier compared with growth of 13-15% just two years ago. Inevitably this has been reflected in some slowing of Chinese domestic spending, slower growth of fixed asset investment, a pause in house price increases in Tier 1 cities, and it was almost certainly behind the slower growth of real GDP in 2018 Q3 (6.5% or 6.0% annualized).

To counter the slowdown and ensure that the downturn in domestic spending does not intensify, the PBOC, China’s central bank, has cut the RRR and lowered interest rates. However, these moves should be seen as counter-balancing the monetary and credit slowdown, not the start of a new stimulus programme. I therefore forecast that the gradual slowing in China’s real GDP will continue, and furthermore, that inflation will remain very low in 2018 and 2019.

Quarterly Economic Outlook 2018 Q3 

Short-term disruption unlikely to derail the fundamental factors driving the global business cycle upswing(July 2018)

Markets have been grappling with a combination of uncertainties, including intensifying trade tensions, the strengthening US dollar, Brexit and the slow-burn financial and political problems of the Eurozone. While these may rattle markets in the short term, I believe that none of these issues are sufficient on their own to derail the fundamental factors driving the global business cycle upswing. I also do not expect the current interest rate increases in the US, the first of the major economies to have initiated the process of monetary policy normalisation, to stifle the current upswing.

For more details, please download the full text of the article.

What's in store for markets in the second half?

Five trends to watch for during the remainder of 2018

Author: Kristina Hooper (Chief Global Market Strategist)

We are coming to the mid-year point for 2018, and the past six months have felt like six years. Markets have experienced a significant uptick in volatility, yet equity investors may not have much to show for all their troubles. Year-to-date performance as of June 22 shows many major indices in the red: the MSCI All Country World ex USA Index lost 3.53%, the MSCI EAFE Index is down 3.43%, and the MSCI Emerging Markets Index lost 6.08%. One of the few exceptions is the S&P 500 Index, which is up a modest 3.04% for the same period.1 What happened? And what are markets telling us about the global economy?

Four key forces have been pressuring stocks

1. Lower growth. While first-quarter earnings were generally strong, markets are viewing those results in the rearview mirror. The bigger focus is what’s ahead — what economic conditions could mean for earnings in the second quarter and beyond. Unfortunately, many major economies — including the US, the eurozone and Japan — experienced a deceleration in growth in the first quarter. While this was largely seasonal, and for some economies could be attributed to poor weather conditions, the first-quarter slowdown appears to have bled into at least the start of the second quarter for most of these economies — except the US — based on recent economic data.

2. Higher costs. Not only do we need to worry about lower growth, we also need to worry about input costs, which cause a narrowing of profit margins. In the April release of the US Federal Reserve’s Beige Book, business owners and managers indicated significant concern about aluminum and steel tariffs driving up input costs. And then there’s the rise in oil prices which, although it has eased recently, could also impact input costs. For example, oil prices helped to push up input cost inflation in the eurozone, which is at its second-highest level in seven years.2 And I fully expect upcoming US employment situation reports to show that wage growth is rising. Rising costs cause a narrowing of profit margins, all else being equal, which in turn reduces earnings.

3. Monetary policy concerns. And then there’s concern that very accommodative monetary policy might soon end. I believe it’s no coincidence that the February market sell-off began the same week that former Federal Reserve (Fed) Chair Janet Yellen handed over the reins to Jerome Powell, which brought uncertainty over whether the Fed would remain so accommodative. In recent weeks, those concerns seem to be coming to fruition: The Fed’s policy-making arm (the Federal Open Market Committee) increased its median policy prescription for the federal funds rate, and the European Central Bank (ECB) announced it would end tapering by December. We also saw jitters earlier this year when markets began to fear that the Bank of Japan (BOJ) would begin normalization sooner than expected — although the BOJ quickly refuted that concern.

4. Geopolitical uncertainty. We have seen a lot of geopolitical uncertainty in recent months. The difficulty Germany had in forming a coalition government, the strained relationship between the different political parties in that coalition, the difficulty the UK has had in orchestrating its Brexit from the European Union, and the fluctuation of tensions between the US and North Korea are just a few of the geopolitical risks adding to the volatility we have experienced this year. The most recent example is the potential for Italy’s coalition government to disrupt not only Italy, but the European Union.

Outlook for the second half of the year

Below are five trends that I expect to see during the remainder of 2018:

1. The global economy should accelerate modestly from here. The US is already showing signs of re-acceleration, and I expect other major economies to follow suit, albeit more modestly. Although this is not a synchronized global growth environment, most economies should improve in the back half of this year. In other words, the lower growth we are currently experiencing is likely only temporary, in my view.

Take the eurozone — I believe there are still positive drivers of this region’s economic growth in 2018.
• The European Commission’s Economic Sentiment Indicator fell slightly for the first quarter, but remains consistent with strong gross domestic product growth.3
• Unemployment continues to fall in the eurozone, although there are significant differences by country.

Globally, growth seems solid. In fact, the International Monetary Fund (IMF) expects the global economy to grow at 3.9% for both 2018 and 2019.4 And, while I believe input costs are on the rise, I don’t expect them to significantly impact profit margins in the near term — unless tariffs proliferate quickly.

2. Globally, the upward bias for stocks remains — but it is diminishing. Given that global growth is likely to accelerate and monetary policy is still generally accommodative, there should still be an upward bias for stocks globally, in my view. I believe that growth and supportive monetary policy are powerful forces that are likely to help stocks end in positive territory for the year. However, that bias is diminishing as monetary policy tightens – and the threat of protectionism grows.

3. I expect to see more disruption and greater volatility. As monetary policy normalizes, I believe capital markets will normalize as well due to an erosion of the support that the Fed’s policy has given to stocks. In this environment, I expect a continued reduction in correlations among stocks as fundamentals matter more. In addition, I expect a continued increase in volatility as monetary policy accommodation is reduced, and geopolitical disruption would further exacerbate that volatility.

While this is not my base case, I think it’s worth noting that the Fed may add to monetary policy disruption as balance sheet normalization progresses, given how powerful a tool it is. The pre-set course calls for an increasingly larger amount of assets to be rolled off the Fed’s balance sheet each quarter. I suspect this could have the opposite effect that quantitative easing had on stocks, putting downward pressure on them and creating more volatility. Complicating this scenario further is that the Fed seems to be preoccupied with the yield curve and concerned about what could happen if it inverted. There is the possibility that, in order to avoid an inverted yield curve, the Fed may accelerate balance sheet normalization. That could be very disruptive for capital markets, particularly equities.

4. Debt pressures are expected to grow. The world is becoming increasingly indebted. As borrowing costs rise, debt is becoming a bigger issue for consumers, businesses and the government. In its most recent Global Financial Stability Report, the IMF warned about the growing debt overhang occurring in different economies.5 This problem is widespread and may have negative effects in any economy that is raising rates. For example, Canadian homeowners are showing signs of coming under pressure given that many have adjustable-rate mortgages. And the headwinds that many emerging markets economies have faced can be at least partly attributed to higher borrowing costs. As monetary policy normalization continues and accelerates in coming years, this pressure is likely to increase. In addition to the short-term effects of debt pressure, there is a long-term effect as well: More money spent on servicing debt means less money available for investment purposes, and that will impact longer-term economic growth.

5. Protectionism continues to cast a shadow. I can’t say it enough: Tariffs are like bacteria in a petri dish — they multiply quickly. I expect current protectionist threats and actions will not dissipate, but will in fact escalate. At times, protectionist threats and actions have sent stocks downward, but investors have been all too willing to believe the threat has passed at the first sign of an abatement in trade drama. For example, Chinese President Xi Jinping’s conciliatory speech at the Boao Forum in March was all investors needed to hear to send stocks upward. But we all know how that ended — with a flareup in trade tensions and clear signs that Xi has no interest in making serious concessions.

Investors should not ignore this very real threat. Protectionism can raise input costs significantly, which can create demand destruction. For example, in 1984, US consumers paid an estimated $53 billion in higher prices because of import restrictions levied that year.6 The day before US President Donald Trump’s tariff announcement, the US Chamber of Commerce issued a statement that US steel prices are already nearly 50% higher than steel prices in Europe and China.7

In addition, the current tariff rhetoric and actions are increasing economic policy uncertainty, which has historically coincided with a slowdown in business investment. In a recent ECB meeting, ECB President Mario Draghi explained that protectionism as well as threats of protectionist actions can “have a profound and rapid effect on business, on exporters’ confidence … and confidence can in turn affect growth.” I strongly believe that business sentiment and, more importantly, business spending are already showing signs of being hurt by the recent wave of protectionism, and it could get worse from here. We can’t forget that in trade wars, retaliation is not limited to tariffs — it can take different forms, such as devaluing a currency or reducing US Treasury purchases or selling existing holdings of US Treasuries.

I can’t stress enough that a significant rise in trade wars could eliminate the upward bias for stocks that currently exists, so we will need to follow the situation closely.

What does this mean for investors?

In this environment, I believe exposure to risk assets is important for meeting long-term goals — especially given my view that an upward bias for stocks continues to exist (albeit in a weaker form). However, mitigating downside risk will be critical, in my view, and that includes being well-diversified within equities and fixed income. And, perhaps most important during this period of uncertainty, I believe that exposure to alternative investments can help with diversification and risk mitigation. That may include strategies such as market neutral portfolios and other lower-correlating asset classes, including those with income-producing potential. One alternative investment to consider is real estate investment trusts (REITs), including non-traditional REITs.

1 Source: Bloomberg, L.P., as of June 22, 2018
2 Source: IHS Markit Eurozone Manufacturing PMI, June 2018
3 Source: European Commission
4 Source: IMF, as of April 2018
5 Source: IMF Global Financial Stability Report, October 2017
6 Source: Gary Hufbauer and Howard Rosen, “Trade Policy for Troubled Industries,” Washington DC Institute for International Economics, 1986
7 Source: US Chamber of Commerce, May 30, 2018

Focus on Asia – Volatility in EM currencies

May 24, 2018

Q1) Year-to-date, we have seen some Emerging Market currencies, especially Latin America, being sold off on the prospects of US rate normalization. It seems that Asian currencies have been more resilient. In your opinion, what’s the reason behind this?
Dr Greenwood: Those EM currencies that sold off most in early 2018 were those that had been plagued by recent monetary or political instability (Argentina, Turkey, Brazil). Conversely, those EM currencies that have outperformed have been mainly those that are seen as oil/energy exporters (Colombia, Mexico and Malaysia). This is in line with the recent strong performance of oil prices.

The resilience of the Chinese CNY, Thai THB, Taiwanese TWD, Korean KRW and Singapore SGD seems to be due to the fact that they are mostly manufacturers that have enjoyed a year or two of improving exports, in line with improving world trade. Although recently economic growth has slowed in the US (Q1) and is slowing in Europe, these slowdowns are probably only temporary following a very strong end to 2017. In my view the most likely scenario is a continued expansion of the US business cycle which should translate into further growth of Asian exports.

Q2) Recent global / Asia economic data have come in softer than expected (e.g. as shown in Citi’s Economic Surprise Index), what do you think are the major reasons for the data disappointment?
Dr Greenwood: The main reason for the recent weakness is that economic expectations and growth were at an unsustainable level in the final quarter of 2017. Encouraged by the proposed personal and corporate tax cuts in the United States that were under discussion at that time and signed into law on December 22, global equity markets continued with a strong rally until the end of January. By any standards that upswing was over-exuberant. The correction in February and March has returned US stock market indices to roughly where they were at the end of December.

It was a similar story in the US economy. Coincidentally, the Citi Economic Surprise Index for the US (an index that measures data surprises relative to market expectations) peaked at 84.5 on December 22 – the same day Mr Trump signed the Tax legislation -- but has basically been falling since then, declining to 10.9 on May 22.

Consistent with the slowdown in developed economies, emerging Asian economies have seen falls in their exports in recent months. For example, Korean and Taiwanese exports (in US$ terms) have both declined since yearend. Others have seen declines in PMIs, factory orders and so on. All this is essentially a spill-over effect from temporary softness in the US and European economies.

Q3) Do you think Asian currencies would be vulnerable for sell-off in the months ahead? What are the positive and negative factors you could see for Asian currencies in the coming few months? And more importantly, under this situation, could further rate hikes by the US pose a threat to Asia?
Dr Greenwood: The main negative for all EM currencies is the continuing increase in USD interest rates and bond yields under the Federal Reserve’s normalization policies. If interest rate differentials between the USD on the one hand and Asian and EM currencies on the other continue to widen, we should expect some further appreciation of the USD. A strong USD has historically been negative for EM currencies, especially commodity producers. This is a price effect that will hurt higher cost EM economies, and benefit only those that are price-competitive, which includes some Asian manufacturers.

However, provided that the US economy continues to grow (i.e. this is only a rise in US rates and not a downturn in US economic growth), then Asian manufacturing exporters should continue to benefit from volume growth. But we should not exaggerate these movements and effects. So far the USD has strengthened only 4-5% on a trade-weighted basis since mid-April, essentially recovering the ground lost in December and January. The USD is still about 8% below where it stood in December 2016. Compared to Asian and EM currencies the USD is still relatively weaker than it was in December 2016.


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