2019 Midyear Global Outlook — Trade in the balance

07.16.19

The trade war between the U.S. and China has become the focal point for markets. Our view for some time has been that economic weakness would continue through the first half of 2019, but that the combination of a resolution in the trade war and economic stimulus in China would result in better global growth in the second half. We now believe that view could be at risk.


IVY VIEW
US China flags

Trade tensions remain greatest risk to global economy

As the first half of 2019 progressed, all signs pointed to a resolution to the trade dispute between the U.S. and China, leading to potentially stronger growth in the back half of the year. This view was based on the belief that the leaders of the world’s two largest economies would be motivated to come to a deal.

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IVY VIEW
US map

U.S. maintains slow but steady GDP growth

Despite uncertainty about trade and signs of global weakening, the U.S. economy remains healthy and is now in the longest economic expansion in U.S. history. We believe the underlying fundamentals — a robust job market, rising wages and low inflation — support continued growth during the rest of 2019. However, U.S. trade policy remains a wildcard and poses a major threat to the current expansion.

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IVY VIEW
upward arrow

The Fed will cut rates at least twice by the end of 2019

The U.S. Federal Reserve (Fed) has held steady on interest rates for much of 2019. Our base case belief at the start of the year was up to two rate increases for 2019. However, increasing pressures from the trade turmoil and uncertainty around the strength of global growth has caused us to change our position. We now believe the Fed will become more accommodative in its monetary policy and will cut the federal funds rate two or three times by the end of the year.


IVY VIEW
market volatility

China continues stimulus measures through end of year

Beginning in late 2018, China stepped up fiscal stimulus because of weaker domestic demand and rising external risk with the trade war.

We believe that China will continue to stimulate its economy if the trade war persists. This action could assist countries that are closely tied to Chinese demand, including certain southeastern Asia countries and some commodity-producing countries, such as Vietnam, Malaysia and Australia. Even so, we are increasingly skeptical that it will be enough to meaningfully accelerate global growth if the tariff overhang remains.

China's Stimulus Measures

  • Tax and fee cuts for consumers and businesses.
  • Higher bank lending and government bond issuance.
  • Incentives for local governments to increase infrastructure investment.
  • Local governments removing onerous property restrictions.
  • People’s Bank of China cuts to the reserve requirement ratio.


IVY VIEW
globe

U.K. faces recession if “hard” Brexit occurs

The expected conclusion to Brexit is weighing on eurozone economic growth. The inability of the U.K. Parliament to find an equitable agreement to leave the European Union (EU) triggered the resignation of Prime Minister Theresa May. We expect Boris Johnson to be the Conservative Party’s choice to replace May.

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IVY VIEW
emerging sun

Fiscal reforms a tailwind for key emerging market economies

Despite near-term concerns and likely volatility across the global equity market, we believe the long-term fundamentals in emerging markets will continue to offer opportunities.

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IVY VIEW
dollar

Global economic relief could come in early 2020

Looking ahead, we believe the recovery we initially foresaw in the second half of this year could instead come in 2020. A trade deal between the U.S. and China could ultimately result in better business confidence, especially if the agreement is more than a cease-fire. Chinese stimulus in 2019 should continue to help certain countries. Additional stimulus would come in the form of easier monetary policy around the globe. Easier policy is likely to help any recovery that may form. While we remain cautious in the short term, we could see some relief next year.



IVY VIEW
key

Market and sector view

Equity markets have roared back following the sharp correction at the end of 2018. The S&P 500 Index had advanced 17% as of June 30, with every sector posting gains. The rally had a pro-cyclical component to it as information technology, consumer discretionary and industrials delivered the strongest sector returns while energy and health care were the laggards.

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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through July 2019, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon.