Laxmi Capital News
Global economic Outlook:2019
Global economic Outlook:2019

After a volatile end to 2018, tentative stability has returned to risky markets at the start of the new year,
with investors seeing some reversal of the losses experienced in December. Growth momentum has
slowed, but the deceleration phase should end before midyear with supportive and flexible policy
actions—notably China easing and the Federal Reserve pausing. Recession risks, in the meantime,
remain modest for the year ahead.

Global Growth
After delivering its second straight year of above potential GDP gains, higher inflation and interest rates
in 2018, growth in the global economy is set to ease off slightly in 2019. Analysts estimates the global
economy will grow 2.9% in 2019, on par with the 3% gain in 2018. “The U.S. economy posted a boomy
3.1% in GDP growth in 2018, a figure which is set to fall to a still-solid, but more moderate 1.8% in 2019,
as fiscal, monetary and trade policies start tightening up,” said J.P. Morgan Chief Economist, Bruce
Kasman. Recent disruptions in the euro area industry are expected to fade and the region is forecast to
grow 1.7%, offsetting some of the moderation in U.S. growth. China on the other hand, is facing
considerable challenge sustaining growth at around 6% as it deals with internal imbalances and external

U.S. Equities
Stocks had a tough end to 2018, after the worst December for U.S. equities in 50 years. In 2019, analysts
expect corporate guidance to provide diverging outlooks for U.S. multinationals and domestic
companies. Overall, S&P 500 companies should strike a more balanced tone and provide guidance for
mid-single-digit earnings per share (EPS) growth for 2019, expanding to $173 this year from $165 in
2018. Buyback activity should remain robust with executions of around $800 billion this year which can
contribute 2% to EPS growth, while reinvestment of dividends supports technical demand. This earnings
backdrop, coupled with depressed valuation and investor positioning, should provide double-digit
upside for equities with potential for the S&P 500 to reach 3,000 this year. The key underlying
assumption here is for a U.S.–China trade deal to materialize. If there is no deal and trade escalation
persists, earnings will likely face further downside. With the government shutdown now the longest in
history, U.S. domestic politics could replace U.S.-China trade tension as a volatility generator for U.S. and
potentially global markets.

Political tail risks remain a headwind for European stocks. It is still unclear whether the current
substantial Italian debt overhang is manageable and in the U.K., equities remain a lose-lose proposition
as the probability for an orderly negotiated exit from the European Union has shifted to just 45%
according to forecasts. The probability of a hard Brexit “no deal” in the first half of 2019 has also gone
down from 10% to 5%, while the likelihood of an “Article 50 extension into the second half of 2019” has
gone up from 0% to 10% according to the latest estimates.

Growth momentum in China continued to weaken at the tail end of last year, as worse than expected
economic data highlighted the slowdown taking place in the world’s second largest economy. Factory
activity is weakening, industrial profits have contracted, imports and exports collapsed and credit
growth continued to edge down despite recent monetary easing efforts. The authorities have pledged to
take counter-cyclical measures to stabilize growth, with various monetary easing and fiscal support
planned for 2019. While the temporary truce between President Trump and President Xi announced
after the G20 meeting late last year has eased near-term trade tensions, non-tariff actions could be used
more widely in the U.S.-China conflict. “We maintain our cautious view that the US-China Conflict may
escalate again in the second half of the year and the economic impact could still be significant on China.
Given the mounting macro headwinds, we expect further policy supports including one more central
bank reserve ratio cut and further corporate tax reduction,” one analyst states from Berkshire hathway.
The government are expected to lower their growth target to 6-6.5% in 2019, with J.P. Morgan
estimating 6.2%, down from 6.6% in 2018.

Emerging Markets
After a challenging second half in 2018 for many Emerging Market (EM) economies, the carryover effect
will likely result in a weak start to the year, but forecast assumes that a cyclical pickup takes hold
starting in the second quarter of 2019, followed by end-of-cycle pressures later in the year. Latin
America is the one region with modestly faster activity forecast in 2019, as China is heavily contributing
to the overall EM slowdown. Brazil in particular is poised to continue recovering, following the
presidential election. In the equity market, EM stocks are expected to deliver double-digit appreciation,
with Brazil, Chile, Indonesia and Russia as top overweight picks.

After sharp falls seen in the oil price in the last quarter of 2018, forecasts are moderate recovery in oil
prices from current levels in the first half of 2019. This view is based on the Organization of the
Petroleum Exporting Countries (OPEC) cutting supply along with its non-OPEC partners, Iran sanctions,
and lower growth in U.S. liquids supply. Later in the year, prices are expected to trend lower as global
growth cools. Brent is expected to average at $73 per barrel in 2019 with the average for 2020 seen at
$64 per barrel. Meanwhile in metals, Gold is expected to average 1325 per troy ounce this year whereas
base metals are expected to come under increasing pressure as the macro cycle rolls over.

The U.S. dollar (USD) had an unexpectedly strong 2019, with the greenback bouncing just under 9% from
February lows, undoing the bulk of 2017’s dollar bear market. This year brings smaller threats from the
Fed and a trade war, but still the same late-cycle concerns around leverage and slowdown As U.S.
growth eases off and the rest of the world catches up, analysts forecast the dollar will be less supported
against the euro and other developed market currencies in 2019, particularly in the second half of the
year. But this is not expected to result in a broad bear market for the USD generally. The British pound
will remain volatile but should eventually move a few percent higher on the delivery of an orderly Brexit.
The British pound will remain volatile but should eventually move a few percent higher on the delivery
of an orderly Brexit with tail risk skewed to a double-digit rally in the event of a no Brexit.

Suman Gautam
Research Analyst
Laxmi capital Markets Ltd.
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