From trade wars to the fading impact of tax cuts and rising interest rates, cynics and optimists alike are divining what they can about the durability of the US economy in the face of a number of domestic and international headwinds.
Lombard Odier Private Bank chief investment officer Stéphane Monier (pictured below) said investors in 2019 will have to tackle the hard-hitting economic one-two of slowing growth and dollar weakness.
‘We expect 2019 to bring a broad-based dollar depreciation due to the declining effect of 2018’s expansionary US fiscal policy, followed by fading US economic growth. This will leave the US with a sizeable twin deficit problem,’ he said.
‘The US/global interest rate spread will also narrow from unprecedented and unsustainable levels as markets raise their rate expectations for other central banks.’
Will Hobbs (pictured below), head of investment strategy at Barclays Smart Investor, warned that the impact of the ‘ebbing US fiscal sugar high’ and President Donald Trump’s tax cuts will probably slow down world growth. Add in the trade disputes with China, and the macro outlook is far from positive.
‘There can be little doubt that the trade skirmish between the US and China has been unhelpful, and could get more unhelpful yet,’ he said.
‘Next year, the ebbing fiscal sugar high in the US will likely join the list [of headwinds].’
But how will this affect stock markets, and was the sharp sell-off seen in the fourth quarter merely a blip or was it the portent of things to come?
Monier said corporate earnings have peaked, but he expected them to remain steady this year, hovering around their long-term average rates. He noted that consensus on this ‘did not meaningfully change’ following the recent sell-off.
He also highlighted banks as a selective opportunity, focusing on those with a strong balance sheet, in this late cycle environment.
‘In the US, the sector has lagged, but if the market strengthens investors may expect to see performance catch up,’ he said.
One area to avoid is the Facebook, Amazon, Apple, Netflix, Microsoft and Google (FAANMG) technology titans, according to Invesco Perpetual chief investment officer Nick Mustoe.
Mustoe (pictured above) said: ‘The US equity market has never been more expensive compared to other regions, skewed by technology stocks. The so-called FAANMGs have dominated market performance in the past 12 months, seeming to promise relentless growth based on society’s digital revolution.
‘Tech company growth rates have been considered relatively resilient to escalating trade tensions as well. The market has continued to narrow with its focus on growth, while paying little regard to valuations. These six technology-related stocks have contributed around two-thirds of global equity returns so far this year. In my view that isn’t sustainable.’
Aegon UK Investment director Nick Dixon is also wary of tech valuations, fearing the sector could disappoint.
‘On the flip side, boring old franchises such as the AA, with declining debt and stabilising profits, could exceed low market expectations,’ he added.