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What will make the difference in 2019?

15th January, 2019

As investors adjust their portfolios for 2019, what will be the key considerations for the year ahead?

◾Markets have been focused on macroeconomic factors in 2018
◾The oil price, trade wars, populism and the Dollar are likely to           dominate
◾Only if some of these big macro questions are resolved will               markets focus on stocks

The trade war may be on pause, but the problem hasn’t gone away. The US is trying to claw back power from an increasingly dominant China. There remains a vast trade deficit between them that neither Trump nor his Democrat opponents are inclined to ignore. China is also accused of stealing intellectual property and manufacturing jobs. These are all legitimate concerns for the US and are unlikely to be resolved with a couple of meetings. Nevertheless, the trade war is hurting both economies and Trump needs to be re-elected in 2020. Both sides have an incentive to find an agreement.

The oil price was slipping towards $50 a barrel having seen a savage drop in the fourth quarter of 2018. The drivers have been worries over excess supply and concerns over a faltering global economy. It has rallied since the start of the year, but if it remains low it would provide an important boost to household incomes at a time when investors are worried about global growth.

Populism is alive and well and wearing a Gilet Jaune in Europe. Some believe it is driving the Brexit process in the UK and the Trump phenomenon in the US. The FT has called populism the true legacy of the global financial crisis. Establishment politics is aware of the problem and recognises that to hold onto power, it’s going to have to come up with some people-pleasing policies. This suggests governments are likely to move away from austerity, towards fiscal stimulus.

By any normal measure the Dollar should be weakening. Trump’s fiscal stimulus measures are likely to see a vast expansion in an already huge deficit, which should put the Dollar under pressure. However, the relative strength of the US economy, plus rising interest rates, has seen the Dollar continue to rise. It seems unlikely to last and any deterioration in the Dollar would be good news for emerging market assets.

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