The year is quickly getting away. Personally I've had so much go on that I can't decide whether this year feels like it's gone really fast or whether it feels like a year in one quarter! One thing I can decide on though is that it's worth taking a quick progress check on the "10 Charts to Watch in 2019".
In the original article I shared what I thought would be the 10 most important charts to watch for multi-asset investors in the year ahead (and beyond).
In this article I have updated those 10 charts, and provided some updated comments.
My original overarching thoughts/themes on the outlook were:
"Overall, the theme of “transitions” I think captures a lot of the major moving parts: a transition for central banks from suppressors to sources of volatility, rotation across assets and markets, and a transition stage in the business/market cycle. Risk is clearly elevated, but as the charts show; so too is opportunity."
What I would change or add in terms of the outlook from here is that globally central banks almost look like they are pivoting back towards being suppressors of volatility. We're certainly seeing early signs of rotation across assets and markets. And with the global economic slowdown I would go out on a limb and say it's transitioning to green shoots...
With that all said, let's get into the charts!
[Note: I have included the original comments from back at the start of the year, so you can quickly compare what I'm thinking now vs what I said back then]
1. Deflation Risk: What's changed in this chart is that more countries have gone into "deflation" in terms of industrial production and forward earnings, but the equity market deflatometer has made a sharp turn down, indicating perhaps the deflationary wave might be over as quick as it began.
"Deflation Risk: as I write, over 80% of world equity markets are in “deflation” (price negative YoY%), the risk here is that we see the black and blue lines turn up (proportion of countries seeing forward earnings and industrial production contracting on an annual basis), and if they do it will probably leave us all feeling a little black and blue, because when it comes to economic deflation, what we’re really talking about is the risk of a global economic recession. Keep this chart front of mind and top of your radar this year."
2. Manufacturing PMIs - EM vs DM: What makes this chart so interesting, and even more so with the Q1 data, is that we could be about to see a repeat of the type of pattern we saw in 2015/16... EM was the first to peak, and apparently seems to be the first to have bottomed. This will get even more interesting if EM is able to outperform DM and lead DM back to recovery. A lot to ask, but with EM central banks having more ammo in the monetary clip, it's an interesting thesis.
"Manufacturing PMIs: down with DM, up with EM? It’s early days, but we’ve been seeing some stabilization in EM economic data (and softening across DM). Given the growing size and influence of EM economies this could be a key chart in determining how the previous chart plays out."
3. EM vs DM Equities Relative Performance: After an initial rally in EM relative performance, it's looking like a false start. But these are very early days and it's normal to see volatility/minor counter-trend reversals in this series, so I would not be counting it out yet. A big driver of what happens next here is going to be as much down to the chart above as the path of the US dollar (I know what I think's going to happen there!).
"EM vs DM – Equities: this one also ties in closely with the previous chart, because this emergent economic divergence is among the many factors (including valuation) which I think will help EM equities comfortably outperform vs DM in coming years."
4. Global Cyclicals vs Defensives: This one is a favorite of mine, and it echoes the PMI chart - we saw Emerging Markets cyclicals vs defensives rollover first, and then recover first too. Aside from the US, the rest of DM has been lagging behind, and I would say watch those closely as they will be a swing factor and a key driver for DM ex-US equities.
"Global cyclicals vs defensives – a key theme in 2018 with rotation well underway. But the key one here (EM again!) is the red line and the nascent rebound: watch closely for follow-through. Since initially publishing this chart in the end of year report we've actually started to see the other regions begin to turn up too (...just like how EM rolled over first)."
5. Global Monetary Policy Trends: It's slightly less obvious in this chart than some of the other global monetary policy monitors I run, but there has been a distinct noticeable global policy pivot (certainly at least a pause). As I noted back at the start of the year the transition from central banks as suppressors to sources of volatility seems to be short-lived, and if true we may well be in for another couple of years of extend-and-pretend for the market cycle.
"More and more global central banks are shifting into tightening mode. My guess is we’ll see more of the same here and more of monetary policy being a source (vs suppressor) of volatility."