Volatility and trade tensions weigh on global markets

After subdued returns from global equities in 2018, investors are expecting a better year in 2019.

Looking across major markets, AMP Capital Senior Economist Diana Mousina says Europe is under short-term pressure. “Italy is in recession and Germany is almost in recession,” she says, explaining that in Germany’s case, changes to the way car emissions are reported have contributed to a slump in car exports.

Growth is stabilising in the US, says Mousina, although the second half of the year is forecast to lag the first. “Confidence numbers are mixed, but have likely bottomed,” she says, explaining that the full effect of tax cuts is yet to flow through the economy.

Overall in the US, conditions are weak but not worsening. “Inflation is not running up, which is why there’s little risk of a near-term recession,” she says.

Japanese outlook

Turning to the Japanese market, Hide Ichii, AMP Capital Portfolio Manager – Global Listed Real Estate, says the economy is resilient thanks to the tight labour market and a number of elections, which are incentivising governments to stimulate the economy.

“Japan is a mixed bag, with positive domestic economic conditions potentially impacted by external factors such as US monetary policy,” he says.

Interestingly, although there are concerns about the declining population in Japan affecting the supply and demand dynamic in the economy, this is being countered by the ageing population stimulating demand.

Trends driving growth

Commenting on structural trends driving global markets, Kusal Meemeduma, AMP Capital’s Senior Investment Specialist, Equities, names rising wealth in emerging markets as a key dynamic.

“The increase in wealth in places like China and the Middle East is a reason why there will be 13 million more millionaires by 2023,” he says. As such, one focus is on identifying opportunities to invest in luxury brands, as demand for their products outstrips supply, and they enjoy superior operating margins.

Animal health is another structural trend driving growth, with Meemeduma citing research that 33 per cent of pet owners believe money is no object when it comes to their furry friends, implying that companies involved in pet care are riding a strong growth dynamic.

Infrastructure opportunities

As for opportunities in infrastructure markets, Joseph Titmus, AMP Capital’s Portfolio Manager – Global Listed Infrastructure, says the rally in defensive listed assets has been positive for the sector.

“We’re watching risks like US Federal Reserve interest rate decisions, but the benign outlook for economic growth and inflation means we’re cautious in the short-term but optimistic about long-term returns.”

Environmental, social and governance considerations

Emily Woodland, AMP Capital’s Co-Head of Sustainable Funds, notes that around the world, companies are increasingly being held accountable, and taking responsibility, for their sustainability challenges, which are reflected in tangible and intangible asset values.

“There’s now more of a sense of urgency around climate change, given the physical impact of the increasing number of disasters such as wildfires, hurricanes, drought and floods,” she says.

Investors are taking notice and acting on this risk. For instance, the organisations that are signatories to the UN’s Principles for Responsible Investment must now comply with the Task Force on Climate-related Financial Disclosures’ (TCFD) requirements¹.

She also highlights key environmental, social and governance (ESG) themes for global investors, including waste management, especially of plastics, as well as water safety, animal and human rights.

Overall, the volatility that has hampered investment markets is likely to persist, but once trade disputes and Brexit have been settled, stronger signs of growth should emerge in the global economy.

¹ PRI, TCFD-based reporting to become mandatory for PRI signatories in 2020, February 2019.