Still in Equities

There have never been four back to back global IP cycles between global recessions before, but it does feel like this is what is going to happen.

Although this would be unprecedented, note that there has never been such a feeble recovery in global growth as in the past decade.

Hence the need for central banks to step in and kill off any rally is simply not there at the moment. If anything, central banks are worried about inflation being too low, not too high.

The fundamental fact is that the global consumer is still consuming at a decent pace and, ultimately, the world has to produce the goods and services required to feed that demand.

Industrial Outlook

The global industrial production cycle should be on a growth path in the first two quarters of this year and it remains to be seen how the industrial production cycle plays out, but it could conceivably be on a growth path all the way into 2021.

One recent data point in particular was German industrial production for November, which registered the strongest monthly gain since the peak of the industrial cycle in May 2018.

Lifting uncertainty

China and the US are expected to sign a phase one trade deal on January 15th. And Brexit worries will continue, but should be less dramatic than last year.

So, things look OK, but how much of this good news is already discounted in markets? Well quite a lot of this good news is already discounted in this author’s opinion since the markets performed really well in the fourth quarter of last year.

On balance, earnings growth of some 5-7% is expected in the US for 2020 and a base case that global equities will return some 5-10% during the year (that is of course not a guarantee). There should be upside risk to this view if global industrial production snaps back quicker than expected.

However, valuations are not cheap and of course there are lots of things to worry about which could go wrong, as listed here:

  1. Trade wars could reignite;  2. Brexit negotiations could go badly; 3. Policy error by a major central bank;  4. Chinese debt bubble could burst; 5. Geopolitical issues in the Middle East; 6. US Presidential election;  7. Taiwan / China tensions could rise

Markets climb a wall of worry and just because there are legitimate things to worry about,
it does not mean markets cannot go up!

© 2019 GWM