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Market outlook 2019

We believe that fears of a global slowdown are overdone, even though we are clearly past the peak in growth. Investor sentiment remains fragile and volatility high as fears about growth and political headlines keep markets on the back-foot.

Yields have fallen on market woes, while credit spreads continue to widen. We look for diversifying and de-correlating strategies, such as alternatives, in a complex environment...

  • In our view, fundamentals haven’t changed much over the past months and fears over global growth are overdone. Nonetheless, with weak sentiment, volatility is set to remain higher and markets on the back-foot as we move into 2019. We still do not think it is time to remove all risk from portfolios as we believe risk assets will manage to grind higher in the coming months. Indeed, markets have already re-priced a much more negative scenario for next year.
  • Trade war headlines continue to drive markets amid fragile sentiment and heightened volatility. While markets have re-priced Fed hikes for 2019 down to below 2, concerns about trade and global growth continue to weigh on risk appetite. European political woes aren’t helping, as the significant deterioration of the situation in France, as well as the delay in the UK Parliament vote on Brexit have added to concerns about the outlook for Europe.
  • We continue to believe that US markets will outperform over the medium term, as European markets remain mired in a wall of worry between politics (Brexit, Italy, France, Merkel transition) and slowing growth. However, we have seen significant outflows already, as with EM, and a lot of bad news is now priced in, so downside should be more limited and a stabilization in growth or an easing in political tensions would bring support to investor sentiment.
  • US Treasury yields have dropped further on growth fears, markets woes, contained inflation and Fed hike re-pricing, now stabilizing around 2.88% on US 10-year. We do not expect a move higher even if trade tensions abate, as expectations for a more dovish Fed and a deceleration in growth should act as a ceiling. We continue to look for flexible, absolute return strategies, but also believe that more core strategies as protection are becoming interesting.
  • Credit spreads have continued to suffer from growth & political concerns and lower oil prices, a trend that is unlikely to reverse in the short term, although it could stabilize if market volatility eases. In the coming months, we do not expect a significant credit event as fundamentals remain relatively healthy, but some caution is warranted as spreads remain relatively tight from a long-term perspective, and growth fears next year could lead to further widening.
  • Looking forward to 2019, the complex investment environment we are navigating is unlikely to abate, implying absolutely return, more flexible strategies that can diversify portfolios continue to be welcome additions. We expect risk assets to continue to grind higher and maintain our exposure. It might not be time to add too much risk, but we don’t think it’s time to take it all off either.

Esty Dwek Roditi , December 2018

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