For a different look into the Asset Allocation team’s views, here's an insight into the regular debate at our team meetings, and why perhaps it’s deals and doves that could surprise markets to the upside next year.


Emiel: As we had alluded to in our 2018 outlook, last year was dominated by geopolitics and protectionism; is this the same key risk in 2019?


Tim (Head of Economics): Yes, protectionism remains on the agenda. However next year we also need to contend with US growth, which appears to have peaked, with the fiscal stimulus reaching its maximum thrust. But the economy may already be overheating. The danger for 2019 is a combination of slowing growth but rising core inflation which forces the Fed to continue hiking US interest rates.


Emiel: If we feel that growth has peaked and there’s a danger that the cycle may end in early 2020, should we not take risk off the table now?


Lars (Equity Strategist): I don’t think so. Our research on previous market cycles suggests that bull markets end with a bang not a whimper. Being six months too early in calling the peak can be just as damaging to performance as being six months too late. So we feel it’s important to remain invested and sell on strength at this stage.


Simone (Risk Manager): I agree, one of the risks we need to consider at this time is reducing exposure too early and missing returns, as both equities and bonds tend to perform well up until a bear market begins. We try to minimise this risk by searching for diversification, including opportunities in markets that tend to outperform in bear market conditions.


Emiel: Agreed. Moreover, I think the risk is that this cycle lasts longer than expected. So, we should stay invested for now. Are there scenarios that we’re analysing in which markets are positively surprised?


Tim: Perhaps. Although NAFTA negotiations concluded positively, US-China relations have worsened throughout 2018 and still provide significant uncertainty to the market.


Lars: However, a positive trade deal could provide a massive boost to markets next year. As we’ve seen this year, markets have surged on any hint of good news out of either Washington or Beijing.


Emiel: So, a deal between the US and China could provide a real shot in the arm for markets. Any other deals you’ll be looking out for next year?


Lars: Could 'Trump the Dealmaker' be a theme of 2019? As Trump faces diminished power in Washington and his eyes turn towards getting re-elected in 2020 ,could a bi-partisan deal to push through an infrastructure spending package? This is not impossible and certainly something that would catch markets off-guard.


Hetal (European Economist): Don’t forget a possible Brexit deal. The outlook for the UK seems increasingly binary; successful navigation of a deal through parliament should see the UK grow at trend pace during 2019. However, any increase in the chances of a ‘no deal’, general election or second referendum poses significant downside risks to this outlook.


Emiel: So, the conclusion is that we remain positive on risk for now but we are clearly in a late cycle playbook, with a flattening yield curve and wider credit spreads which exacerbate market volatility.