PHILADELPHIA, PA, July 23, 2018 – FIS Group, a manager of U.S. and global developed, emerging and frontier markets equity portfolio strategies, today issued its latest Q3 2018 Market Outlook, ‘A Final Melt-Up.’ In the context of a strong U.S. dollar, the potential for the U.S. economy to overheat, and ratcheting up of trade tensions, FIS Group is taking a more defensive market position.
“Our market indicators suggest we may be entering the final, more volatile ‘melt-up’ of this market cycle,” says Tina Byles Williams, CEO and CIO of FIS Group. “The most significant risk for the immediate to long term are the consequences of the U.S. economy overheating – particularly in the context of the Trump Administration’s tax cuts and spending policies, which are projected to grow the budget deficit of 4.6% GDP next year.”
Strong U.S. dollar signifies slowdown
According to the Q3 2018 Market Outlook, the U.S. dollar – a counter-cyclical currency that tends to outperform when the global economy is decelerating – is up nearly 2 percent to date. This growth will continue if the Chinese economy continues to weaken and global growth remains under pressure. Although the U.S. Dollar is not cheap on a purchasing power parity basis, long-term interest rate differentials suggest room for appreciation from current levels.
Emerging markets have been at the tip of the spear in a tightening dollar liquidity environment. Heavily indebted economies, including Turkey and Argentina, have been the first to falter. Emerging market dollar debt is now at the same level as the late-1990’s, both as a share of GDP and export levels. Local currency emerging market issuers could be vulnerable to further tightening of U.S. financial conditions.
Growth in the Euro area peaked last year, with real GDP growth slowing down, particularly as a response to slower credit growth. Euro area growth is also being hampered by slower growth in China and other emerging markets. Disappointing growth and rising trade tensions are likely to weigh on the Euro.
Escalating trade wars?
An escalating trade war is a significant risk to the markets, according to Byles Williams: “The obvious Damocles Sword hanging over the markets is that one of the greatest drivers of productivity gains over the past two decades – the integration of global supply chains – is now in grave danger of stalling. It is unclear as to what extent the ‘Age of Globalization’ will unravel.”
According to the Q3 Market Outlook, this ratcheting up of geopolitical risks is taking place at a time when key policymakers seem less inclined to cushion the markets against adverse developments. FIS Group believes it will take a significant drawdown in global risk assets to dissuade the Federal Reserve from its plan of fiscal tightening, while Chinese policymakers will only deploy fiscal and monetary stimulus to their economy in the face of a steep slowdown.
Defensive market positioning
In terms of FIS Group’s Q3 2018 positioning on the markets, Byles Williams states: “We continue to be overweight in developed markets, but have increased our weights to more defensive bourses or currencies, for instance, Switzerland or Japan. We remain underweight on emerging markets, as a result of tightening dollar liquidity, China’s continued slowdown and gathering threats of a trade war. We are rotating our sector positioning from an overweight to cyclical sectors to a neutral weight and increasing our allocation to the more defensive consumer staples sector.”