In our 2018 Point of Focus, we
highlighted several key factors that caused us to stress caution for 2018.  The continued rise in asset class valuations
while disconnecting the underlying risk caused by geopolitical tension had the
predicted outcome as markets fell in the last quarter.  Too much liquidity was flowing to a limited
set of asset classes in an effort to diversify risk away and replace low
yielding government securities.


2019 will be a transitional
year.  Underlying fundamentals will
continue to drive global growth, albeit at a slower pace, with valuations
reflecting this adjustment in reality.  We
do not predict a recession, but a return to sanity as growth comes at a cost as
we depart from the historic decade of nil level interest rates.  Markets will become increasingly volatile in
the mid term as it adjusts to the new equilibriums.  There are several points we want to draw
attention to in the coming year that will contribute to market movement:


Geopolitics will be at the
forefront this year.  Despite a modicum
of volatility in recent, markets have largely shrugged off the growing bouts of
political tension arising across the globe. 
The longer term implications of populist policies are beginning to take
hold to a level that investors can no longer turn a blind eye to.  In 2019, elections in Europe, India, Argentina
coupled with policy movements in China and the developing markets will cause
greater uncertainty towards the international order of trade that has dominated
global norms in past decades.  The
current destabilization of the US and UK political systems will continue to
contribute to volatility moving forward this year.    


Equity valuations remain a concern
even after the most recent retracement as they are still trading at the high
end of historical ranges.  Risk premiums
for debt are still low, and property prices globally are still unaffordable for
the average person.  These factors point
to the beginning of a potential devaluation cycle. 


China’s economy is wading through a
trade war slowdown as well as a government sponsored deleveraging.  We remain cautiously optimistic that the
Chinese government will be able to keep tight controls and navigate these
perils; however there will be winners and losers.  Fortunately, they have been consistent in
telegraphing which industries will come under pressure and which industries
they will support.


Emerging markets suffered the most
in 2018 as investors fled to safety in developed markets, depressing valuations
to historic lows.  As volatility
continues, there will be opportunities to invest in the next set of global
growth engines at bargain prices.  But
focus will have to be sighted on a combination of true fundamentals and a
calculation of underlying political and economic risks.