Ritu Vohora, investment director at M&G Investments, offers her outlook for global growth in 2019 and looks towards the East, where China could provide the real engine.
While global growth may be slowing it is not rolling over. Picking up the baton for keeping the growth momentum going is China which now accounts for 33% of the world’s economic growth, while the rest of Asia comes a close second with 30%. This compares with just 11% for the US and a mere 4% for the eurozone.
While China grows in prominence, it is still deemed an emerging market, with the need for further investment, infrastructure and productivity gains, while its capital market is evolving. So the story still has a long way to run. The recent stimulus from the Chinese authorities may not be on a par with that of 2016, but the government’s more targeted and cautious approach – as it gradually transitions the economy to a more sustainable growth rate – is beginning to bear fruit. We can see that from the recent pick-up in industrial production, new orders and manufacturing surveys.
Apart from opportunities in China, we also see pockets of value in Japan. The increased rate of corporate profitability, driven by rising returns on equity, has yet to be reflected in stock prices. Coupled with the improvements in corporate governance, we maintain our view that Japanese stocks are attractive relative to historic levels.
Elsewhere, Brexit woes continue to envelop the UK stock market which we see as a buying opportunity. The yield gap between UK equities and bonds is the cheapest it has been since World War I. Emerging markets (EM) also look attractively valued with improving fundamentals and the twin headwinds of dollar strength and rising bond yields abating. However, given the polarised EM universe, selectivity will be key.
But, as ever, investors should choose carefully and take a long-term view on portfolio construction. Given the double-digit gains we have witnessed since the beginning of the year, slimmer returns are likely as we enter the second quarter.
Overall, valuations in the US are starting to look expensive, in our view, and risks to the downside remain. The biggest headwind facing investors is that policymakers make a mistake. Market commentators are perhaps too complacent in their belief that US interest rates will stabilise, or even fall, from current levels. If the US Federal Reserve falls further behind the curve and has to tighten aggressively this could trigger a recession.
For the moment, investor sentiment remains cautious, with record equity outflows being recorded. Should those outflows change to inflows, this could add further momentum to the rally. However, valuations are now back to normal levels, so upside from earnings will be critical to drive the stock markets higher from here.
