The market sentiment may be positive or negative. When investors have risk appetite, they choose higher-yielding currencies like the AUD, the NZD, the CAD, they buy stocks. Oil also performs great in these circumstances. When traders are averse to risk, they prefer safe-havens like the JPY, the USD, and gold. What will be the prevailing mood in 2019 and which assets will gain the most on the basis of it? To understand that we’ll have to look at the issue at hand from different angles.
The Organization for Economic Cooperation and Development (OECD) lowered its forecast for the next year’s world’s GDP growth from 3.7% to 3.5%. According to OECD, “the global expansion has peaked and is likely to slow over the next two years.” The most common opinion is that global economic growth will either stay the same or decline, the acceleration is no longer expected.
The strongest link in 2018 was the United States. American economy outperformed and the Federal Reserve raised the key interest rate 4 times attracting monetary inflows from emerging markets. The latter experienced an outflow of funds and didn't enjoy this setup. The continuation of high growth and high rates in America may hurt other nations. Countries that are likely to have difficulties include Turkey, Argentina, Brazil, Mexico, and Iran. The boost from Donald Trump's tax reform is expected to fade later in 2019. This can cool the US economy in the second half of the next year. The year-end may become challenging for Japan as well as the Asian country plans to raise the sales tax in October.
The main problems are that investment and trade growth disappointed, financial market conditions have tightened, and confidence kept declining. The United States announced that unless a trade deal is reached with China until March 1, it will impose new tariffs on China’s exports. Chinese President Xi Jinping is not willing to back down and accept US conditions.
There is also a “sleeping risk” in the form of China’s $34 trillion pile of public and private debt. So far all has been quiet, but this bomb may explode and lead to a big market crash.
These days there are a lot of political topics with global fallout. Britain is still tormented by Brexit. It will lead to another spike in volatility in January 2019 and then ahead of the official date of the UK’s departure from the European Union on March 29.
In Europe, Italy has a clash with the EU authorities about its budget. More political issues of this sort can arise in the medium-term.
Other things that rock the entire economic world include US sanctions on Iran, tweets and actions of the US President, conflicts within the Organization of Petroleum Exporting Countries (OPEC).
The upcoming elections include votes in Thailand in February, in Indonesia in April, and in South Africa in May. There will be a question of German leadership as the current long-time Chancellor Angela Merkel decided not to run again as head of the Christian Democratic Union. In addition, the term of the European Central Bank President Mario Draghi will end in October, and there will be a battle of succession.
Trying to predict the future is like gazing into a crystal ball: a year is a long time and anything may happen, so it’s hard to make out anything precise. However, our judgment is that there will be more risks than opportunities next year. That’s why the long-term bet is with the refuge assets (gold and JPY). Even if the existing problems somehow get a peaceful resolution (for example, it’s likely that a Brexit deal arrives and makes the GBP fly high; CAD will rise when the US Congress ratifies the United States-Mexico-Canada Agreement), always remember to protect yourself from the bad scenario. To do so, diversify your assets and have some safe havens on your account.