We believe U.S. economic growth and earnings growth are going to decelerate in 2019. Fiscal stimulus is fading, and the impact of tax reform will force earnings growth back to levels more typical of an economy in the later stages of expansion. Normalization does not mean recession; however, it is notable how many downside risks exist today.
US-China relationship – Ultimately it is about more than just trade. The U.S. Vice President’s speech on October 4th made clear there are issues that are strategic in nature, including technology, intellectual property and national security in addition to the trade deficit. While the Trump-Xi meeting at the G20 Meeting in Buenos Aires has offered a respite from the trade rhetoric that has negatively impacted markets and global growth, the risks of further escalation clearly remain and could impact markets over the course of 2019.
Continued monetary tightening – While the U.S. Federal Reserve may be closer to the ephemeral “neutral” level implying a more data dependent approach, the European Central Bank is set to begin to taper their asset purchases and the Bank of Japan may be forced relax its policies around yield curve control to support their banking system. Tighter financial conditions can be a headwind to growth.
Margin compression – Rising costs via wage pressures, higher logistics and materials costs may negatively impact margins. Tax reform was a one-time benefit that will not contribute to earnings growth again in 2019. With the unemployment rate at the lowest level of the expansion, wage pressures are expected to continue. In addition, the impact of tariffs will begin impacting margins.
After hovering around 2% for much of the post-crisis period, year-over-year wage growth has recently moved above the 3% threshold. As labor markets are set to further tighten, wage growth pressures are likely to increase, dampening corporate profitability.
U.S. Unemployment Rate and U.S. Average Hourly Earnings
Corporate credit – Widening credit spreads will negatively impact borrowing costs. Low interest rates enabled companies to increase leverage and engage in large share buybacks to support earnings per share (EPS) growth during the expansion.
Middle East geopolitics – Oil prices below $60 per barrel are not sufficient to meet most Middle Eastern economies budgetary targets. OPEC and Russia may look to cut production to maintain prices creating further tension with the U.S.
European politics – Brexit and Italy continue to present potential flashpoints that can negatively impact European growth. The sense of populism is difficult for markets to discount.
Factoring in the potential downside risks described above, market volatility is expected to remain elevated. As a result, equity markets will be forced to rely on dividends and earnings growth for much of the gains next year as any increase in equity market valuations are unlikely.
Given the outlook above, we generally:
• Favor Value over Growth strategies in general
• Favor Emerging Markets over Developed Markets
• Expect large caps should outperform small caps
• Believe Quality as a factor should perform well
Lastly, we believe the environment for active management is greatly improved. The shift from quantitative easing to quantitative tightening will impact liquidity, lead to higher risk premiums and impact corporate performance leading to higher dispersion in equity prices.
2019 Investment Outlooks
The Limits of U.S. Growth
An Extended Business Cycle
Liquidity is the Question
A Plethora of Risks
Current Volatility, Long-Term Opportunity
Choppy Markets Ahead
Time to Get Defensive?
Royce & Associates
A Shift Toward Cyclicals
Focus on Growth
Download The Full Report
The Bank of Japan (BoJ) is the central bank of Japan and is responsible for the yen currency.
"Brexit" is a shorthand term referring to the UK vote to exit the European Union.
A credit spread is the difference in yield between two different types of fixed income securities with similar maturities, where the spread is due to a difference in creditworthiness.
Developed markets refers to countries that have sound, well-established economies and are therefore thought to offer safer, more stable investment opportunities than developing markets.
Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.
The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency
The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.
Quantitative easing (QE) refers to a monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the direct purchase of debt securities.
The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.
Dividends represent past performance and there is no guarantee they will continue to be paid.
Diversification and asset allocation strategies do not assure a profit or protect against market loss.
Investments in small-cap and mid-cap companies involve a higher degree of risk and volatility than investments in larger, more established companies.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors and eligible counterparties in EU and EEA countries:
In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.
In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.
Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.