Investor sentiment deteriorated further in December. European economic data weakened, political risks remain elevated, and hopes of a Brexit solution were dashed. The global economy is slowing but by how much? Investors need to square the extent of the slowdown with low valuations.
Our broad macro view is that despite the deterioration in investor sentiment and market pullback, we believe that the significant imbalances in the real economy or financial sector that typically emerge at the end of the cycle, are not currently apparent. Demand in most parts of the world, particularly in the US, remains robust, although it will slow this year. China is also slowing, but we believe that the government still has levers at its disposal. Globally, the fall in the oil price and in the US Dollar will stimulate, and central banks will adjust policy.
Until very recently, the market has been overlooking many of Europe’s problems. The region’s economic growth has begun to slow and political risks have risen, a very different picture from 18 months ago when growth was accelerating and the election of Macron appeared to offer the prospect of a reformed Europe. The inconsistencies at the heart of the European project remain and will be further tested post European and Italian elections later in the year.
Political risks will remain, but the economic backdrop will be very similar to what we have seen over the last 4-5 years with a series of short mini-cycles. Investors need to internalise this and not be thrown off course by the volatility in the stock market.