Friday Highlight 

What macro uncertainty can investors expect?

What macro uncertainty can investors expect?

As we enter the final quarter of 2018, a solid near-term global growth outlook is clouded by uncertainties.

Robust US economic activity is underpinning the economic expansion, but trade tensions in particular are weighing on sentiment, given their potential to disrupt corporate supply chains and dent business confidence.

The range of economic outcomes ahead has clearly widened, although our indicators suggest that consensus forecasts have now become too bearish, especially in the US, as fiscal spending picks up into year-end. 

Tightening financial conditions globally, driven in part by higher short-term interest rates and a stronger US dollar, have created a trickier environment for risk assets, exacerbating the troubles of those emerging markets with weak fundamentals in particular.

Our global outlook into year-end remains broadly pro-risk but we place increasing emphasis on building portfolio resilience. US stocks’ robust earnings outlook makes them our top pick, and we focus on higher quality exposures across both equity and fixed income markets. We have not yet lost faith in emerging markets where valuations now reflect significant downside risks. 

Investing amid rising uncertainty is not a new theme for UK investors.

Our base case for Brexit sees a withdrawal deal being reached that unlocks a two-year transition period. Yet, as the nation’s scheduled exit from the European Union (EU) next March rapidly approaches, solutions to the complex Irish border issue in particular have proved elusive, and the nature of the future of UK-EU trade relations remains unclear.

Our proprietary macro indicators point to 12-month forward consensus estimates for UK growth standing at steady, albeit unspectacular, levels of 1.3 per cent by year-end. This is lower than prior to the 2016 referendum (and also most other developed markets today), but better than the gloomier forecasts ahead of the Brexit vote.

Consumer confidence is holding up, and subdued productivity growth suggests that a tepid pace of growth may be enough to keep the labour market tight. A mild bounce back in second quarter GDP supports the view that the previous quarter’s particularly weak performance was more a reflection of the bad weather, not the business climate. 

UK core inflation has proved to be sticky at around 2 per cent, thus vindicating the Bank of England’s August decision to raise rates for only the second time since 2007. If UK core inflation remains around current levels (a view supported by our indicators on a six-month horizon), we do not expect further policy tightening until more clarity emerges regarding the UK’s exit from the EU. 

With crunch time approaching, our base case scenario remains that pressure to avoid a no-deal outcome will ultimately result in a compromise, with a transition period beginning in March that may subsequently be extended.

Yet a souring in UK-EU relations after the informal “Salzburg Summit” makes an already bumpy path ahead now look even more jagged.