2019 Global Market Outlook: The late-late cycle show

[, Music ] welcome to our 2019 global market outlook, I'm Russell Investments, senior investment, strategist, Paul Idleman and I'm joined today by senior quantitative investment strategy. Analyst dr. Kara, Eng Kara. What'S ahead for 2019 Paul late, cycler risks are rising and monitoring these risks will be critical to avoid buying a dip that turns into a slide, so we're looking out for US Federal Reserve, tightening trade wars and uncertainty in China. Italy'S budget standoff with a European Commission and ongoing breaks at issues are holding our attention as well. We expect volatility to continue into 2019, but we don't expect a u.s. recession until 2020. We do expect global equity markets to deliver mid-single digit returns with better potential in Europe and Japan than in the US. We expect the Fed to deliver three to four hikes in 2019, which will probably lead to the long anticipated inversion of the US Treasury yield curve. In eurozone equity markets, we foresee eight percent growth in earnings in 2019 positive compared to the past two decades. To achieve that, eurozone gross domestic product growth needs to stay at around 1.5 percent, which we think is very achievable. The three main risks to this scenario are the budget conflict between Italy and the European Union, a disorderly brexit and an escalation of the global trade war. But we expect these three risks to fade during the course of 2019 in the UK. Equities continue to look cheap on our 2019 scorecard and at 1.4 percent tenure gills are still expensive in asia-pacific. We foresee another solid year. We expect emerging Asia to deliver over 10 percent and earnings growth. While we believe Japan will exceed its modest expectations. Japanese and Chinese equities look attractive, while Australian equities are close to fair and we think the Reserve Bank of Australia will raise rates once in 2019. In Canada, we see if the downturn in commodity prices as an ominous sign for future earnings growth, but the cycle is still modestly positive and we're slightly bullish on Canadian equities. Focusing more closely on the global economic picture, the current US expansion will become the longest on record if it continues to july 2019, which seems likely to us. That said, we believe US GDP and corporate profit. Growth will slow next year, while inflationary pressures are building. The tailwind from the Trump administration's fiscal stimulus program should last into early 2019, but from that point it starts to become a drag on the economy in 2020 outside the United States. We think Japan and Europe had the potential to outperform pessimistic expectations, and China's economy is on track for GDP growth of around six and a half percent in 2018. That would mark its slowest pace since 1990, going forward, China faces headwinds from high indebtedness, slowing property, construction, aging, demographics and trade wars. We expect their growth to be closer to six percent in 2019. Let'S turn to asset class. Specifics, starting with global equities, were overall view as neutral were underweight US and more positive on non-us developed. We like the value offered by emerging market equities, but trade wars, slowing China and a strong US dollar keep us neutral there for fixed income. We, like the value offered by US Treasuries. Our models give a fair value yield of 2.7 percent for the US 10-year bond. We see German, Japanese and UK bonds as very expensive and high yo credit is also expensive. Credit spreads typically rise late in the cycle when profit growth slows and default concerns rise for currencies. The yen is our preference. It'S significantly undervalued getting cycle support, as the Bank of Japan becomes less dovish and it has contrarian sentiment. Support from extreme market short positions. The euro and British sterling appeared undervalued as we move into 2019. We also believe the US dollar has modest upside potential. Okay, Kara, let's wrap this up for 2019 volatility should continue. There should be some upside for equities and we expect the recession to hold off until 2020. The late cycle risks are rising and it's a year where we'll focus on successfully managing those risks on behalf of our clients, as always, we'll keep a close eye on. What'S coming and we'll strive to keep you informed thanks for watching thank you, hi, I'm Erik ristuben, chief investment strategist for Russell Investments. If you like what you saw in this video and want to see more like it, please subscribe to our YouTube channel, you

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