Last month, U.K.-based investment bank Barclays PLC (BCS) (LSE:BARC) laid out a series of predictions and recommendations for investors in 2019. The forecast was notable for its relatively sober outlook, emphasizing potential economic slowdowns across the globe (although shying away from predicting any actual major recessions) and advising investors to be more conservative and risk-averse.
How is the global economy positioned for 2019?
“The global economy for 2019 doesn’t look anywhere near as strong as we thought it would be a year ago. The eurozone, in particular, has disappointed all year, primarily because of a slowdown in global trade that started in the first quarter. We still expect the euro area to grow at 1.5% next year, which is still above trend, but the risks are now to the downside.
China has slowed rapidly in recent months, even though the impact of trade and tariffs hasn’t had a chance to drag down the data yet. We expect Chinese growth of 6.2% next year, which is quite low by their standards...By contrast, the United States had a very good 2018, but the second half of 2019 is likely to be slower, primarily because the fiscal stimulus fades.
Now look, we don’t mean to sound too gloomy, The fact remains that none of the world’s major economies should be close to recession next year, and the US and the eurozone will still be growing above trend”.
Overall, this is quite a restrained prognosis, and one which emphasises the increased level of uncertainty which has now become the new normal for markets. In particular, it highlights the problem of reduced global trade as a major factor in this drop in growth. As the U.S.-China trade war rumbles on, with little sign of progress on the horizon, this problem is likely to be exacerbated. Add to this the increasingly likely no-deal Brexit, and we have a scenario in which global trade may take an even greater hit in 2019.
As noted in the last paragraph, Barclays is not forecasting an actual recession in any of the main economies. Forecasting recessions is notoriously difficult (if it were easy, policymakers would attempt to counteract them), and no financial institution, particularly one with clients on both the institutional and retail sides, wants to be the bearer of bad news. Still, though, this forecast was made prior to the Christmas slump, and one wonders whether Barclays would have been more aggressive in their bearishness with the benefit of hindsight.
Recommendations for asset allocation in 2019
“In the very near term, our asset allocation recommendation is to be long risk...For the first time in many quarters, we recommend being overweight high-quality US fixed income over global equities, bonds such as investment-grade corporates and agency mortgages. Emerging markets have had a tough time all year, but we still think it's too early to get in, with the exception of EM dollar debt. And finally, the US dollar should continue to strengthen against most emerging market currencies, and be range-bound against the rest of G10. The bottom line is, after many years of strong returns in the run-up to 2018, investors need to prepare for a world of lower returns and higher volatility”.
"Risk-off" should be the tagline for this recommendation. Although the bank doesn’t give a target for where it see equities ending 2019 relative to where they were in late 2018, the fact Barclays views holding debt as preferable to holding equity is notable in and of itself. If this does indeed end up being sound advice, it could be very bad news for passive investors, who will see their exchange-traded fund portfolios stagnate or even decline. The good news is a bearish environment creates more opportunities for value investors to ply their craft as solid companies get dragged down with the rest of the market.
Summary
Although fears over a global economic slowdown have entered the mainstream in recent months, it is still interesting to see a major financial institution take a relatively bearish tone for its yearly outlook. Investment banks typically tend to err on the side of optimism - for instance, Bank of America (BAC, Financial) and Well Fargo (WFC, Financial) project the stock market will end 2019 up 15% and 20% off the 2018 close. Barclays make it clear it does not expect any such rally and, as such, provides a much-needed counterpoint to these rosy forecasts.
Disclaimer: The author owns no stocks mentioned.
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