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AUTUMN OUTLOOK 2019

October 14, 2019 in Uncategorized

Autumn Outlook 2019

REVIEW OF THE PAST QUARTER:

Weakening global economic data triggered by heightened political uncertainty and renewed US-China trade tensions spurred central banks to continue down the dovish path this quarter. The US Federal Reserve cut rates by a quarter of a percentage point twice over three months. The Bank of England maintained rates but will look to reduce them if Brexit uncertainty continues. Finally, outgoing European Central Bank chairman Mario Draghi lowered interest rates and restarted the bond-buying scheme, all while urging key member states like Germany to open their purse strings and help combat slowing growth.

It has been a summer of political drama. In Italy, right wing nationalist leader Matteo Salvini’s gamble on an early election spectacularly backfired, leaving Prime Minister Giuseppe Conte to lead a new coalition government. Tensions in the Middle East remain high after the attack on a Saudi oil processing plant, spiking up the oil price. Over in Argentina, the peso weakened by 26 per cent against the US dollar after primary election results showed the real possibility that the government could lose power in October

Brexit uncertainty also remains high in the UK. Meanwhile, economic growth continues to be revised downwards due to anaemic business investment as companies uncertain of the short term future, prefer to hoard cash rather than investing on productivity boosting technology.

Autumn Outlook Review

ASSET CLASS RETURNS

Cash
0.19%
Government Bonds
+6.20%
Index Linked Bonds
+7.76%
Corporate Bonds
+3.60%
UK Equities
+1.27%
Overseas Equities
+3.87%
Emerging Markets
-1.11%
Property
+0.48%

THE ACTUARIAL VIEW:

Economic forecasts now make grim reading, with 2020 looking to be worse than this year, and have been getting worse with each passing quarter. Germany is teetering on the edge of recession, whereas the US has gone from asking how many rate rises there will be to how many cuts there will be. Globally, bond yields have been falling significantly – Germany can now borrow for 15 years at negative rates. Intriguingly, equity prices have also risen – normally this is because companies are expected to do better, but in some cases it can simply be that the alternatives look worse, and in the current climate it looks to be the latter.

Rising prices mean returns are down. UK equities are the asset class that has significantly lagged – they did OK in UK sterling terms, but UK sterling has also done badly. Fundamentals look better in relative terms, making them more attractive. Lower yields make bonds less attractive, particularly in the short term relative to cash. Corporate bonds have improved relative to gilts, but have deteriorated relative to UK equities.

Autumn Outlook The Actuarial View

WHAT TO LOOK FOR IN Q4:

  • UK: The Brexit deadline is on 31 October. The Monetary Policy Committee (MPC) announcements, minutes and quarterly inflation report are set to be released on 7 November.
  • US: There will be interest rate decisions from the Federal Open Market Committee (FOMC) on 29-30 October. Minutes will be published three
    weeks after each decision. GDP Growth for Q3 (advance estimate) on 30 October.
  • Eurozone: Quarterly GDP flash data is set to published on 31 October. A European Central Bank monetary policy meeting has been arranged for 24 October.
  • Other Data: Argentina general elections on 27 October. China year-on-year balance of trade data is available on 14 October. Japan’s tax hike
    comes into effect on 1 October.

ASSET CLASS SCENARIOS:

UK Equity

Most Likely: A negotiated Brexit deal has become the most likely scenario given the recently approved Benn Bill. The ratified Act is Johnson’s least desirable outcome given his pledge to remove the UK from the EU by 31 October, “do or die”. Logistics aside, leaving the EU with a deal should be positive for UK equities. A strengthening currency would hamper large companies which underperform smaller ones, further aided by the BoE’s current pause on interest rate increases.

Worst Case: A no-deal Brexit remains the worst prognosis for the UK as the positive impact of a weaker UK sterling on the revenues of offshore revenue generating UK companies would likely be offset by fears of disorder and economic downturn. The likelihood of this outcome has recently decreased due to the Benn Act, which requires parliamentary approval of a no-deal outcome, for which there appears little support.

Best Case: A soft deal remains the most realistic best-case scenario as parliament’s suspension has left very little time to rally significant MP support for a second referendum or even a general election. With markets having become more jittery recently a soft deal would likely be very well received as an end to the saga.

Global Equity

Most Likely: Central banks in Europe and the US continue with their accommodative policy, supporting equity markets and insuring against slowing global growth. Trump’s trade war is likely to retain focus over the quarter and further bouts of volatility are to be expected as both sides look unlikely to give way. In Japan the consumer tax hike comes into effect in October, which could see Japanese equities, particularly consumer related sectors, under pressure.

Worst Case: The trade war takes a new turn with Trump targeting Europe, further dampening global growth. Weak manufacturing data in Europe continues, adding downward pressure to European equities. Brent crude continues to rise as uncertainty surrounding the attacks on oil facilities in Saudi Arabia adds a temporary boost to inflation, hurting consumer spending.

Best Case: The Fed’s accommodative stance provides markets with some near-term relief and sends a signal to investors that the central bank will continue to intervene if necessary. Any progress in the US/China trade talks would be positive for markets.

Emerging Market Equity

Most Likely: Emerging markets are likely to be driven by market expectations of Fed easing, the US dollar and trade uncertainty. Emerging market currency strength in September was driven by the hope of more aggressive easing. Instead, the Federal Reserve forecasted no more cuts in 2019 and 2020, which was more hawkish than markets expected. If global uncertainty persists, it is unlikely that emerging markets will see a tailwind of a weaker US dollar despite the Fed easing.

Worst Case: Trade uncertainty, unfortunately, has become the new normal, with markets up or down based on US President Donald Trump’s tweets rather than any change in fundamentals. If trade uncertainty continues, global investors will likely steer clear. If the strong US dollar persists, vulnerable economies like Brazil, Turkey and Argentina are set to suffer further.

Best Case: Countries like Taiwan are already benefiting from US-China tensions as corporates have begun shifting production away from China. Emerging market central banks have become the most dovish since 2008, with at least seven countries cutting rates this year. While this should be supportive for equities and bonds, there may be a negative impact on currencies.

Cash

Most Likely: The BoE has signalled its intention to maintain its interest rate policy for a while. Core inflation should remain within the 2 per cent – 2.5 per cent range, which means returns from cash remain negative. But demand for cash is likely to increase as investors wait for a Brexit settlement.

Worst Case: The worst-case scenario for cash savers is a no-deal Brexit, as currency weakness pushes inflation higher. As Brexit negotiations turn sour and imported inflation compounds, the BoE will be forced to cut rates to stimulate the economy. Returns from cash will further dive into negative territory.

Best Case: Any progress in Brexit negotiations could well be taken by the BoE as a signal to continue tightening, especially if wage growth surprises to the upside. In such a scenario, returns to cash would improve despite staying negative. Similar to government bonds, cash could also act as a safe-haven during bitter negotiations between the government, the UK parliament and the EU.

Fixed Income

Most Likely: Next quarter could be challenging for bond markets, as central banks are not expected to intervene in the next quarter. Bond investors might not be able to rely on interest rate sensitivity (duration) to drive returns. Central banks have resumed their bond purchases programmes, meaning that the demand for fixed income instruments has increased, driving prices higher. Credit markets should outperform government bond markets, as companies sit on healthy cash balances.

Worst Case: We have reverted to a ‘normal’ situation where any sign of wage growth and inflation is bad news for bond markets. Any sign that global economies are nowhere near recession could bring yields up, which will drag down both government and corporate bond markets. Investors would panic if central banks reverse the decisions taken recently.

Best Case: Bond markets might have already priced in negative news – as such, the upside is now limited. But political uncertainty will continue to act as a drag on bond yields, anchoring the investors’ expectations to lower levels from current ones. Companies might further delay their capital expenditure decisions and lower their debt level. Bond purchase programmes should bring prices for corporate bonds higher.

Property

Most Likely: Central banks around the world have gone into full reversal since the end of 2018, and now all appear to not just be ‘correcting’ rates but embarking on an ‘easing’ cycle. This should be positive for global real estate investors as funds previously invested in fixed income may return to the sector looking for yield, although there is the underlying issue of slowing economic growth caused by geopolitical tensions and slowing business investment that could dampen this effect.

Worst Case: The political uncertainty in Europe could increase, especially that surrounding the Brexit deadline, causing any delays in investment to be delayed further – or worse, a no-deal scenario, causing upheaval in supply chains across the continent. In the US, any increased rhetoric around tariffs on China will be negative for economic confidence and the effects of previous tariffs could come through and hit corporate earnings growth.

Best Case: Central banks accelerate their dovish monetary policy stance further, whilst global political tensions lift and investors regain confidence for taking further risk in order to achieve a higher yield that is not currently available in fixed income markets. A clearer path on the outcome of Brexit negotiations will also help to boost UK real estate.

This document has been prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. FE Research is a division of Financial Express Investments Ltd, registration number 03110696, which is authorised and regulated by the Financial Conduct Authority (FRN 209967). For our full disclaimer please visit www.financialexpress.net/uk/disclaimer. Data Sourced from FE Analytics and Bloomberg Finance LP

SUMMER OUTLOOK

July 15, 2019 in News & Events

SUMMER OUTLOOK

REVIEW OF THE PAST QUARTER: Just as global growth has started to stabilise, it is at risk of being derailed by multiple headwinds. Uncertainty is very much the narrative this quarter as political risks heightened, causing markets to become even more jittery. The hardball style of the self-proclaimed ‘Tariff Man’, US president Donald Trump, has seen the US-China resolution blow up, and while trade talks are scheduled to restart, whether a meaningful outcome will emerge remains unclear. Elsewhere, additional sanctions will be applied by the US to Iran in response to Iran shooting down a US drone. As a result, supply-shortage fears have pushed up the price of oil.

Meanwhile the US Federal Reserve (the Fed) has continued to take a hands-off approach, hesitant to not tinker with a fragile global system. However, compared to the prior quarter the market is convinced that the Fed will relax its stance and apply interest rate cuts this year. Over in the eurozone, the region continues to be hampered by political risk. Italy and the EU restarted their conflict over the nation’s refusal to curb public spending. The key difference this time is that populist support has swelled to such an extent that Italy is comfortable with not backing down from EU threats. In the UK, it has been an eventful quarter as Theresa May relinquished power after repeatedly failing to get parliament on board with her withdrawal bill. Boris Johnson is in pole position to be new prime minister.

CFPML - SummerOutlook-2

THE ACTUARIAL VIEW: Markets look to have well and truly recovered from their December meltdown, it is not clear though whether this has been driven by improvements in the prospects for the underlying businesses, or simply that any alternatives have got worse. The news can be difficult to keep track of, with ongoing political and economic uncertainty. Yet some GDP figures have turned out better than expected, which has indubitably provided a boost. While forecasts were predicting a slowdown, what the actual results revealed was a slightly slower slowdown, so it was hardly all good news. The International Monetary Fund is forecasting global growth projections will be at their lowest level since the financial crisis. On balance it seems that negative news outweighs the positive.

From a modelling point of view this translates into assets being more expensive than they were previously, with no improvement in the underlying prospects. This means only modest changes to the asset allocation models themselves. There are some relative changes – for example, emerging markets were slightly less affected, meaning we can be slightly more positive on them. The biggest change is that cash now looks a better prospect over the short term than bonds. thanks to the risk/reward trade off.

CFPML - SummerOutlook-3

WHAT TO LOOK FOR IN Q3:

  • UK: The Monetary Policy Committee (MPC) announcements and minutes, along with an inflation report, are to be released on 1 August.
  • US: There will be interest rate decisions from the Federal Open Market Committee (FOMC) on 30-31 July. Minutes will be published three weeks after each decision. The FOMC projection for inflation and economic growth is due 18 September. Non-farm payrolls, which indicate wage growth, are set to be released on 1 August.
  • Europe: Quarterly GDP estimated data is set to published on 31 July. A European Central Bank Monetary policy meeting has been arranged for 25 July.
  • Other data: China year-on-year GDP growth and industrial production is to be released 15 July.

Uk Equity - CFPML
Uk Equity – CFPML

Most Likely: With central banks holding interest rates constant amid recessionary fears, the potential for rate cuts has increased, which could be positive for UK equities. However, this will likely be outweighed by negative investor sentiment as UK businesses stop stockpiling and political uncertainty heightens following the extended Brexit deadline and hardliner Brexiteer Boris Johnson potentially in the PM role, which increases the threat of no deal. UK equities will thus likely lag their developed market peers and could well see a softer quarter, especially given the solid start to the year we have witnessed.

Worst Case: The UK leaving the EU with no deal (more likely under a Johnson PM-ship), followed by a surprise interest rate hike as inflation sets in, would likely see a broad sell-off in UK equities, given the long-term headwinds, increased recessionary risks and negative sentiment toward the UK economy this outcome would imply.

Best Case: With the probability of another referendum significantly lower with two pro-leave PM candidates, a soft deal would likely be the best outcome of the possible Brexit option-set – this is what markets have largely been expecting. Coupled with an interest rate cut, this would be particularly positive for UK equities.

Global Equity - CFPML

Most Likely: The market expects the Fed to cut interest rates over the summer as economic data in the US weakens. We expect trade war tensions and political uncertainty to persist, potentially weakening investor sentiment. In Europe, economic growth is resilient; however, the political environment remains fragile, meaning further uncertainty for markets. Overall, we expect volatile periods of performance for global equity markets over the summer.

Worst Case: US president Trump continues to threaten other nations with sanctions and trade spats, resulting in downward pressure on markets. Political sentiment in Europe continues to worsen with the Brexit deadline looming and Italy’s budget controversies continuing, potentially weakening investor confidence.

Best Case: President of the European Central Bank Mario Draghi has spoken of the possibility of further easing, indicating to markets the European Central Bank will support markets if necessary. This extends to other regions, as in both the US and Japan monetary policy remains accommodative. Trump changes tact on his approach to trade and international relations, easing tensions.

Emerging Market Equity - CFPML





Most Likely: Sentiment towards emerging markets is likely to remain positive as the Fed adopts a more dovish stance. The outcome on the US-China trade deal is yet to be reached so more trade-sensitive areas could be volatile in the meantime.

Worst Case: Any disappointment on the trade front or the market pricing in fewer than three rate cuts would be a negative catalyst. Sensitive areas like China and South Korea look particularly vulnerable where growth is already slowing before accounting for potential trade-conflict effects. Elsewhere, execution risk looms in Brazil around political reforms and results are required to justify high expectations.

Best Case: Sentiment would improve further if a US-China deal is reached. The market’s expectations of at least three interest rate cuts in the US should prove most beneficial to Brazil, Turkey and Argentina. India appears especially compelling under its prime minister, Narendra Modi, who secured a second term with a bigger majority, ensuring a continuation of his pro-market reforms, which could attract more investment into the country.

Colored bank note and coins with text "Cash." Autumn Outlook - CFPML Chartered Financial Planners

Most Likely: Following the signal sent by the Fed to financial markets, the BoE has also signaled its intention to maintain its interest rate policy for a while. Core inflation should remain within the 2 per cent to 2.5 per cent range, which means returns from cash remain negative. Headline inflation is unlikely to come down significantly over the coming quarter due to UK sterling’s weakness and lack of labour force.

Worst Case: The worst-case scenario for cash savers is that inflation continues to rise with cost-push pressures at the fore. Another likely headwind is UK sterling weakness as Brexit negotiations turn sour and imported inflation compounds woes, with the BoE refraining from further tightening for the already weakened consumer.

Best Case: Any progress in Brexit negotiations could well be taken by the BoE as a signal to continue tightening, especially if wage growth surprises to the upside. In such a scenario, returns to cash would improve, despite staying negative. Similarly to government bonds, cash could also act a safe-haven with financial markets being undermined by global trade tensions.

Fixed Income - CFPML

Most Likely: Which central bank will cut its interest rates first? Expectations for the Fed to cut interest rate levels are high, while the US economy is showing resilience. The returns on bond markets are likely to stay volatile as investors will wait for any indication of a recession. With the risk of increasing interest rates being limited, credit markets might outperform if companies keep on improving their balance sheets.

Worst Case: After several years of monetary stimulus, we might have reverted to a normal situation where any sign of wage growth and inflation is bad news for bond markets. Markets have quickly interpreted the Fed’s recent decisions as: the recession is down the road. Any sign that global economies are nowhere near recession could bring yields up, which will drag both government and corporate bond markets. The oil price and the relations with Iran could also be negative.

Best Case: Bond markets might have already priced in negative news – as such the upside is now limited. But political uncertainty will continue to act as a drag on bond yields, anchoring the investors’ expectations to lower levels from current ones. Companies might further delay their capital expenditure decisions and lower their debt level. The low level of debt supply relative to demand might boost bond prices.

Black silhouette of a skyline with text "Property." Autumn Outlook - CFPML Chartered Financial Planners







Most Likely: In the UK, as for the past three years, Brexit talks are dominating sentiment and we should see returns in the sector closely linked to news coming out. Elsewhere, with interest rates still low compared to property yields, further progress should be made, and a weakening pound will help the overseas investments of UK investors.

Worst Case: A softening in the US economy and the Fed cutting interest rates would be negative signals for US property investors and could spill over to the rest of the world. In mainland Europe, Germany dominates the market and further rent-control news could undermine investors’ sentiment. The UK could follow the US path if the likelihood of a no deal materialises and signs of a recession show.

Best Case: A resolution (or even the perception of a resolution) to the chaotic Brexit negotiations with the EU would lift uncertainty off investors’ shoulders and, provided the outcome is a trade deal, would give reassurance about the future of the UK economy. On the other side of the pond, an interest rate cut could reinvigorate the market by making mortgages more affordable.

SPRING OUTLOOK

April 4, 2019 in News & Events

Spring Outlook

REVIEW OF THE PAST QUARTER:
Markets have rebounded from last quarter’s selloff as investor sentiment picked up. This has been driven by a perceived change of heart at the US Federal Reserve where it is expected they will stop hiking rates and become more cautious. In addition, thawing tensions between the US and China have helped boost hopes of a deal but key stumbling blocks, such as digital trade, remain and could yet see hostilities drag out.

Political uncertainty remains high in the UK, with there still being no clear plan on how to deliver Brexit, despite the two-year Article 50 deadline coming and going. Although the European Union have agreed to extend the deadline, there is a still a chance the country crashes out with no-deal, if it is unable to agree any alternative.

Meanwhile in commodities, both iron ore and oil prices have been surging, albeit for different reasons. A tragic dam collapse at an iron ore mine in Brazil led to concerns of a supply crisis, which in turn helped fuel iron ore prices to a peak of US$88/per tonne. Oil’s resurgence was down to deliberate supply cuts by Opec (the Organisation of the Petroleum Exporting Countries) starting to materialise. In more worrisome news, prices have also been influenced by the deteriorating conditions in Venezuela.

Spring Outlook Chart

Spring Outlook Asset Class Returns

THE ACTUARIAL VIEW:
A global economic slowdown has been on the horizon for a while now; recently however there has been evidence that a hard landing is in the offing. Much of this risk has been caused by politicians, whether it be over Brexit in the UK or US president Donald Trump and the ongoing US-Chinese trade war across the Atlantic. Not all the gloom is AngloAmerican however, as Germany only narrowly avoiding a recession.

Spring Outlook - Asset Allocation Changes Short Term ChartSpring Outlook - Asset Allocation Changes Long Term

Globally, interest rates are down, making bonds look less attractive. In the UK the FTSE is forecast to pay out a 5 per cent yield this year, an astonishingly high amount with bond yields so low and illustrating the attractive valuation of the UK equity market. Doubtless Brexit uncertainty has been responsible for the low valuations. When combining the valuations with the preponderance of overseas revenue in the index, it is clear the UK market provides significant protection against all but the most severe scenarios. With this in mind there has been a significant increase in the UK allocations into the models at the expense of global equities. In short-term portfolios there has been a move into cash and away from bonds – this is due to the increased downside in bonds and better relative returns from higher risk assets.

WHAT TO LOOK FOR IN Q2:
UK: Monetary Policy Committee (MPC) announcements and minutes, along with an inflation report, are to be released on 2 May. Brexit timelines have been extended until 12 April at the minimum.

US: There will be interest rate decisions from the Federal Open Market Committee on 30 April-1 May. Minutes will be published three weeks after each decision. Year-on-year core inflation rate is published on April 10. Non-farm payrolls, which indicate wage growth, are set to be released on 5 April.

Europe: Quarterly GDP data is set to published on 30 April. A European Central Bank Monetary Policy meeting has been arranged for 10 April.

Other: India’s general election is set to start on 11 April in seven phases and end on 23 May, whereupon a new prime minister will be elected. South Africa’s general election is set for 8 May.

ASSET CLASS SCENARIOS:

Uk Equity - CFPML

Most Likely: With three deals rejected and the Democratic Unionist Party’s (DUP’s) lack of support for a fourth, the path forward is unclear. If the government can’t find some compromise that can attract support, they have until 12 April to decide on either a longer extension to Article 50, or no deal. Under pressure to avoid a no-deal scenario, a longer extension period is agreed. Avoiding a no deal will be reprieve enough to spark a relief rally for equities and UK sterling, though this may not be long lasting given the underlying uncertainty about the UK’s future that will still prevail.

Worst Case: During the extended Article 50 period May buckles under pressure from hard-line Brexiteers who are averse to a longer extension and gives in to no deal, which remains the worst outcome for UK equities and Sterling, both of which would see a broad sell-off with multiple longterm headwinds.

Best Case: Parliament approves a deal. The avoidance of a no-deal scenario, combined with clarity on what Britain’s future looks like, will be positive for both UK sterling and UK equities, outweighing the headwind to large caps from the stronger pound.

CFPML-Cash

Most Likely: Following the signal sent by the US Federal Reserve to financial markets, the Bank of England has also signaled its intention to maintain its interest rate policy for a while. Core inflation should remain within the 2 per cent to 2.5 per cent range, which means returns from cash remain negative. Headline inflation is unlikely to come down significantly over the coming quarter due to cost pressures from a range-bound oil price.

Worst Case: The worst-case scenario for cash savers is that inflation continues to rise with cost-push pressures at the fore. Another likely headwind is UK sterling weakness as Brexit negotiations turn sour and imported inflation compounds woes, with the Bank of England refraining from further tightening for the already weakened consumer

Best Case: Any progress in Brexit negotiations could well be taken by the Bank of England as a signal to continue tightening, especially if wage growth surprises to the upside. In such a scenario, returns to cash would improve despite staying negative. Similarly to government bonds, cash could also act a safe haven, with recession kicking in for the US.

Global Equity - CFPML

 Most Likely: As the US Federal Reserve isn’t planning to hike rates through 2019 we expect investors to make the most of the last legs of the bull run, particularly as the trade tensions seem to have eased (for now) between the US and China. This back and forth from the US Federal Reserve, Brexit and trade spats will likely bring further volatility in the quarter to come.

Worst Case: The trade spat between China and the US reignites and adds downward pressure to markets. The populist parties take the lead in the European parliamentary elections and either nothing gets done as they can’t agree, or they push forward with their populist promises, which could hurt sentiment towards European equities. On top of this, as the tax cut benefit wears off and the likelihood of disappointment from earnings increases, the downside potential for US equities rises.

Best Case: Despite the ‘gilets jaunes’ protests in France, financial markets recovered from the turmoil of Q4 2018 in Q1 2019; however, the European Central Bank is unlikely to shift from its easy monetary policy, as inflation remains below target. Trade tensions keep to a minimum and the world keeps on turning – despite US president Trump’s best efforts to the contrary.

Fixed Income - CFPML

Most Likely: The highlight of central banks’ meetings last month was the indication of a more patient approach to any future adjustments to the interest rate levels in the world. The returns on bond markets are likely to stay volatile as investors will wait for any indication of a recession or latestage cycle. With the duration risk being limited, credit markets might outperform if companies keep on improving their balance sheets.

Worst Case: After several years of monetary stimulus, we might have reverted to a normal situation where any sign of wage growth and inflation is bad news for bond markets. Markets have quickly interpreted the US Federal Reserve’s recent decisions as an indication a recession is coming soon. Any sign that global economies are nowhere near recession could bring yields up, which will drag both government and corporate bond markets.

Best Case: Bond markets might have already priced in negative news – as such, the downside is now limited. But political uncertainty will continue to act as a drag on bond yields, anchoring investors’ expectations to lower levels from current ones. Companies might further delay their capital expenditure decisions and lower their debt level. The low level of debt supply relative to demand from institutions might drag yields lower

Emerging Market Equity - CFPML

Most Likely: Sentiment towards emerging markets is likely to improve further and equities could end the quarter in positive territory as the US Federal Reserve has signalled a pause in rate rises. While US president Donald Trump delayed the 1 March tariff deadline, the consensus appears to suggest that a trade deal will go ahead; however, until it is reached there could be some volatility.

Worst Case: If a US-China trade deal is not reached, emerging markets and in particular the more sensitive regions to global trade are likely to reverse their strong upward advance. This quarter will see general elections in India, and the rupee has traded high on optimism that the government, led by Indian prime minister Narendra Modi, will be reelected. Any disappointment is likely to surprise on the downside.

Best Case: Sentiment is likely to continue to improve for emerging markets and a US-China trade deal would be the cherry on top. The pause in US rate rises should be most beneficial for those countries that have a high proportion of US dollar-denominated debt, such as Brazil, Turkey and Argentina.

CFPML-Property

Most Likely: European real estate investment trusts (REITs) remain attractive due to the European Central Bank maintaining ultra-low interest rates, ensuring a favourable environment for consumer and business spending. The UK continues to be the least attractive region, given the continued lack of clarity around Brexit. In the US, the Federal Reserve has continued to refrain from further rate hikes, ensuring the yield gap between bonds and US REITs remains attractive to investors.

Worst Case: In the UK, Brexit talks dominate investor sentiment with a number of direct property funds switching to bid pricing in a bid to deter outflows. An accidental no deal would be harmful for both UK growth and, subsequently, the property market. Similarly, a scenario of trade war escalation could potentially see selloff contagion spill over as investors exit riskier asset classes.

Best Case: A resolution to trade tensions between the US and China. Key central banks refraining from rate hikes this year would help global REITs, which had cheap valuations this year due to rising rates in 2018. An end to the Brexit uncertainty and an outcome that is favourable for UK companies will help drive prices in this region.