If the end of 2018 showed us anything, it is that no gains are safe. Thus, advisors must continue to prepare their clients for continued volatility, according to analysts from BNP Paribas Asset Management and Northern Trust in their annual outlooks. That said, neither group believed the economy will fall into recession, at least in 2019.
“The global economy has lost some momentum, and we expect to see some further signs of this in the long term,” said BNP’s senior economist, Steve Friedman, in a webcast presentation. “But concerns about a recession in the near term either in the U.S. or more broadly are overdone.”
The three key reasons for this “relatively upbeat outlook” are: 1) Developed market central bank policy will remain accommodative. “We already are seeing the Federal Reserve pivot in a more dovish direction,” he said, 2) There has been progress made on trade issues between the United States and China. “While a full agreement appears far off, we believe that recent progress will allow the freeze on tariffs agreed to in Buenos Aires to be extended beyond March 1 to allow for more time for negotiations,” he added, and 3) They expect further monetary and fiscal policy easing by China, where Friedman sees growth above 6%.
Northern Trust’s 2019 outlook notes that “continued low inflation gives central banks an excuse to either take their foot off the brake or continue easy money policies. This has allowed us to take an opportunistic approach; earning positive returns is easier when companies don’t have to ‘fight the Fed’ or other central banks.”
One point BNP’s Friedman made was that the Federal Open Market Committee has “a very delicate balancing act,” adding that the bank must have learned from the “great inflation of the 1970s when persistently low unemployment rate led to very high inflation.”
He believes the Fed will err on the “side of caution taking policy only gradually into restricted territory.” He says that because inflation is “quite limited at present,” the Fed can be patient.
Even Northern Trust states that recent comments by the Fed chairman may mean the Fed “may finally appreciate the benign inflationary environment.”
Both firms are optimistic about trade talks between the U.S. and China. Northern Trust states that “ongoing U.S.-China interactions are causing some volatility in the markets. However, instead of being swept under the rug, conflicts are being addressed by talking openly.”
Friedman sees China’s growth coming in at 6.5% or higher. “The fact remains that Chinese authorities remain committed to deleveraging and structural reforms and this will impose some constraints on easing measures going forward,” he said. They still expect tax cuts in China, and there are significant spending projects planned for 2019, especially in transportation and oil and gas.