Jon: Going back to the idea of further U.S. economic leadership, we expect it to continue this year despite a sharp slowdown relative to other geographies. The economy has been quite resilient this year; remember one year ago we were concerned about an imminent recession in the U.S., yet growth in the first two quarters was pretty solid and continues to surprise to the upside even in the second half, despite a slight slowdown. We expect domestic growth to run above two percent, compared to Europe, where the economy is on track for a little more than one percent.
Fred: There are structural reasons to explain why global growth is decoupling. Each region has very different political climates, track records on fiscal policy, and room for central bank intervention. Europe has challenges in Spain, Italy and obviously Britain that prevent it from keeping pace with the U.S. Meanwhile, China appears to be having a more cyclical slowdown. With some luck, gross domestic product (GDP) will come in at six percent or slightly below in 2020, but overall the path forward is headed toward slower global growth.
Jon: Nonetheless, there are bright spots to be found. We’ve noticed a lot of asset allocators moving toward European equities for the low valuations, so there’s certainly opportunity for some pick-up in ex-U.S. exposure. With respect to emerging markets (EM), there is a lot of debate over the impact Chinese stimulus could have in the coming years. As Fred mentioned, we expect slower – but stable – GDP numbers for its domestic economy, but there are broader concerns that this round of stimulus will not extend to other EM countries reliant on their trading relationships with China. A lot of Southeast Asian economies are, for example, extremely dependent on exports and could be negatively impacted by a prolonged tariff war. That said, we’re generally bullish on EM debt because there’s plenty of room to manoeuvre on the monetary policy side, unlike in developed markets, where rates have been near or below zero for years.
Fred: Also, as previously mentioned, strength in labour markets will be a key source of consumer confidence and economic stability. It’s a positive sign that recent salary forecasts predict global wages to grow at 4.9%, beating inflation expectations of 2.8%. At present, our base is for labour markets to remain solid in their support for risk assets. Beware downside risks though; if profit margins get too tight and macro uncertainty persists, the employment framework could ultimately weaken.