December 20, 2018
J.P. Morgan Research offers their key market and economy calls for 2019.
The global economy posted another solid year of above average growth in 2018, boosted by strong U.S. output that expanded at its fastest rate in over a decade. The Federal Reserve hiked four times, the U.S.-China trade debate emerged as a key theme for markets and Brexit negotiations remain inconclusive. So what’s in store for the year ahead? As 2018 draws to a close, here are the key 2019 forecasts from the J.P. Morgan Research team.
More Upside Seen for Stocks as Earnings Stay Positive
The current cycle is close to the longest uninterrupted expansion since 1860, which has caused anxiety among investors. “This concern seems misplaced, in our opinion, since the present cycle has already experienced two intra-cycle resets, in mid-2011 and late-2015,” said J.P. Morgan Head of U.S. Equity Strategy, Dubravko Lakos-Bujas, adding that 2018 could be viewed as a third reset — a year characterized by significant deleveraging and unwinding of crowded trades, with equity positioning now at very low levels. Looking ahead, fundamentals should remain healthy, as far as earnings, investment spending, corporate balance sheets and leverage are concerned. While earnings are expected to decelerate relative to 2018, they should still remain positive and continue to grow according to J.P. Morgan forecasts. “Based on our probability-weighted analysis of U.S.-China trade outcomes (55% trade deal, 35% cease-fire, 10% tariff escalation), we set our 2019 S&P 500 price target to 3,100 and earnings per share (EPS) estimate at $178,” said Lakos-Bujas.
U.S. to Cool as Europe Bounces Back
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. J.P. Morgan estimates the global economy will grow 2.9% in 2019, slightly lower than the 3.1% forecast for 2018. “The U.S. economy posted a boomy 3.1% in GDP growth in 2018, a figure which is set to fall to a closer-to-trend 1.9% 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 2%, offsetting moderation in U.S. growth. China on the other hand, is facing considerable challenges sustaining growth at around 6% as it deals with internal imbalances and external drag.
Brexit and Italy in the Spotlight
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 50% according to J.P. Morgan forecasts. The probability of “no deal” in the first half of 2019 has also gone down from 20% to 10%, while the likelihood of “no Brexit” has doubled from 20% to 40% according to the latest J.P. Morgan estimates.
U.S.–China Trade Tensions to Continue
President Trump and President Xi agreed on a temporary truce after their G20 meeting in December, with further tariff actions put on hold for 90 days to allow negotiations. Despite the tentative ceasefire, uncertainty remains high. Even with an agreement, negotiations will likely be bumpy and confrontations may intensify again, making the U.S.-China trade relationship a key driver of the Chinese equity market. The government are expected to lower the growth target to 6-6.5% in 2019, with J.P. Morgan estimating 6.2%, down from 6.6% in 2018.
Emerging Markets Look Mixed
“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 our 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,” said J.P. Morgan Head of Currencies, Commodities and EM Research Luis Oganes. Latin America is the one region with modestly faster activity forecast for next year, as China is heavily contributing to the overall EM slowdown. Brazil in particular is poised to continue gradually 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.
OPEC Supply Cuts to Boost Oil
After sharp falls seen in the oil price in October and November, J.P. Morgan forecasts a 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, but later in the year prices are expected to trend lower as global growth cools. Brent is expected to average at $73 per barrel next year according to J.P. Morgan Research, with the average for 2020 seen at $64 per barrel. Meanwhile in metals, the gold price is expected to pick up in the second half of the year and base metals are expected to come under increasing pressure as the macro cycle rolls over.
Dollar is Down, But Not Out
The U.S. dollar (USD) had an unexpectedly strong 2018, with the greenback bouncing just under 9% from February lows, undoing the bulk of 2017’s dollar bear market. “The biggest change the team expects in 2019 will be the fading of U.S. economic exceptionalism,” said Head of Cross-Asset Fundamental Strategy John Normand. As U.S. growth eases off and the rest of the world catches up, J.P. Morgan 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. Elsewhere, sterling will likely remain under pressure amid Brexit negotiations.
Three More Fed Hikes
Global growth is expected to become more synchronized and the Federal Reserve (Fed) will hike three times in 2019 according to J.P. Morgan forecasts. Supported by a tightening Fed, rising policy rates in other developed market (DM) countries and higher inflation expectations, J.P. Morgan projects 10-year yields will rise to 3.6% by the end of the year. The inversion of the yield curve, or the difference between the 2-year and 10-year Treasury yields, will also be closely followed in 2019. Since 1960, seven of the last eight yield curve inversions were followed by recession and the J.P. Morgan Fixed Income team expects it to turn negative in late 2019. In Europe, 2019 will be better than 2018 with 10-year German bund yields expected to hit 1%. In the U.K., as Brexit negotiations rumble on, J.P. Morgan Research is bearish on U.K. rates, with a baseline forecast of 1.75% for 10-year gilt yields in the second half of the year.