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.
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.
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.
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.
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
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
- Local governments removing onerous
- People’s Bank of China cuts to the reserve
U.K. faces recession if “hard”
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.
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
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.
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.