Where are global equities headed after scary quarter?

About 90 per cent of the asset classes are in the negative, with the Dow Jones Industrial Average shedding 7.45 per cent so far this year.

Investors should expect conditions to get tougher in 2019 as central banks are likely to continue tightening [their] monetary reins.

- Luca Paolini | Pictet Asset Management

The S&P 500 index has already tumbled into bear market terittory along with the Nasdaq Composite index.

The Dow Jones Industrial Average had been on a bull run for a decade, marking new highs year after year on the back of easy money that floated through the system, thanks to policies implemented by central banks from the United States, through the European Union to Japan.

“Investors should expect conditions to get tougher in 2019 as central banks are likely to continue tightening the monetary reins, leaving markets exposed to the risk of further political upheaval,” Luca Paolini, chief strategist at Pictet Asset Management said.

Pictet feels that investors should watch out for risks like faster than expected inflation and its impact on rates.

The US Federal Reserve is expected to undertake two hikes in 2019 after raising rates four times in 2018.

Secondly, risks may also emerge due to the debt crunch in Italy and an escalation of a trade war between the US and China — plus the factors on which the rally in 2018 was based seem to faltering. Analysts expect that US corporates may post lower-than-expected growth in the top and bottom lines amid the waning impact of tax cuts.

“The global equity market is likely to be flat next year, on a total return basis, and we expect lacklustre corporate profit growth. US stocks should end 2019 in the red. They are among the most expensive in the world, and a likely turn in US business, consumer and investor confidence and the potential for more monetary tightening set up a challenging environment,” Paolini said.

The underlying tone is that of caution going ahead, looking at the allocations that traders have been resorting to in US equities.

“The markets have been sold-off, which indicates there is uncertainty. You need to remain invested. You need to be in defensive stocks like utilities, and consumer staples from cyclicals like energy, technology and consumer discretionary,” Nadi Bargouti, managing director, head of asset management at Emirates Investment Bank said.

EIB is underweight on equities and fixed income and are into defensive stocks. A breakthrough on trade war or on the Brexit front would trigger a change of view.

Tactical:

UBS, however, thinks that equity markets are more likely to rise than fall over the next six months. It holds an overweight position in stocks in the tactical allocation.

“We also continue to mitigate downside with portfolio hedges. They include long exposure to the Japanese yen, and an S&P 500 put spread to reduce our downside exposure to equities. We take advantage of the volatility with new tactical relative value positions, including an overweight in emerging market equities versus Swiss equities,” Mark Haefele, global chief investment officer at UBS said.

In its annual prediction, Saxo Bank has made a few outrageous Predictions for 2019. This include Apple securing funding from Tesla and US president Donald Trump firing Federal Reserve chair Jerome Powell.

SOME OUTRAGEOUS PREDICTIONS

- Source: SAXO Bank