Slowing German output and lower inflation in the US and China will likely favour bonds over equities and export-oriented European equities over domestic-focused stocks in Q1 2019, according to an analysis by Kestrel Investment Partners (KIP), an independent global allocation investment manager.
According to KIP’s analytical models, economic conditions initially likely to be supportive of equity valuations early this quarter nonetheless probably will not be sustained throughout Q1 2019, given that economic conditions in the Eurozone will deteriorate markedly as recessionary pressures build in Germany, while US growth descends toward trend, and Chinese stimulus measures take time to show their effects.
KIP explains that US real economy growth and inflation look to continue slowing in Q1 2019, prompting expectations of US monetary policy going on hold. Downside surprises in German and Eurozone industrial activity probably will prompt additional, emphatic monetary policy support from the ECB, while in China the central bank already has implemented new measures to reinforce domestic money supply and credit expansions.
John Ricciardi (pictured), Chief Executive of Kestrel Investment Partners, says: “The balance between improving financial conditions, yet deteriorating economic fundamentals, especially in the Eurozone, will give major support to bond markets during the quarter, even if better financial conditions initially support shares.”
“Investors likely will do well to hold full bond allocations at the beginning of the quarter along with moderate allocations to risk assets, including emerging market shares, before again underweighting equity markets when significant headwinds to global growth, particularly from the Eurozone, prove to be persistent.”
“If Germany shows recessionary conditions, as our models suggest, then the Euro will come under intense pressure. A devalued Euro will be supportive of export-oriented European stocks while detrimental to sectors tied to domestic growth.”
