10 Charts to Watch in 2019 [Year-End Update]

The end of 2019 is fast approaching! (what a year it's been...) Following on from the original "10 Charts to Watch in 2019", the Q1 update, and the half-time update, here's the final update to the 10 charts to watch in 2019. The key purpose of this article is to update the charts and see how things are tracking relative to where I saw things at the start of the year.

It also serves as a bit of a preview to the 2019 End of Year Special Edition of the Weekly Macro Themes report, which I will be publishing next week. Part of that report is what I consider a really important discipline of taking stock of my past work and seeing what worked well and what didn't (and therefore where I can maintain a high standard as well as improve and enhance what I'm doing).

With research it's a little bit different to trading or portfolio management where you basically get real time insights from your PnL or performance reports about what's working/not working, in research where your job is to support the portfolio manager it can be a bit more subtle (less so on specific ideas, but more so in regards to work that fills out the bigger picture or helps lower the threshold for action).

So keep an eye out for that report.

But back to the task: 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.

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."

As for what's changed at a high level on the outlook from here, transitions again becomes a key word with central banks having now come full circle going from significant tightening to now significant easing. We have indeed seen some rotation across assets/sectors/styles and this has resulted in a lot of relative metrics becoming stretched and looking just visually like they're at a turning point (e.g. small vs large, value vs growth, EM vs DM, cyclicals vs defensives). We have also seen a transition stage in the cycle, but perhaps not what you think: it looks like another mini-cycle is underway, a sort of mid-cycle reset moment or late-cycle extension as I have termed it. Risk was there to be found in 2019, but opportunity definitely was also, with both equities and bonds performing fairly well on a YTD basis. I won't delve too much into the 2020 outlook (that's one for next week), but you can probably gather my drift here.

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: There's a couple of things to note with this one, firstly, yes economic deflation did sweep the globe and we have seen recessionary conditions in the export/manufacturing sector of a lot of economies and regions. Secondly, just as the breadth of equity markets in decline spiked late last year, we've seen a stark turnaround in the later part of this year. If you ask equity markets, deflation risk is dissipating.

"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."

deflatometer - tracking deflation across economies

2. Manufacturing PMIs - EM vs DM: Interestingly on this we did see ongoing relative resilience in emerging markets. By contrast the EM (Emerging Markets) manufacturing PMI has been relatively stable vs the large reset in the DM (Developed Markets) manufacturing PMI. This is going to be a really interesting one to watch going into 2020. So far in the post-financial crisis world, we have only seen EM PMIs outperform DM PMIs when DM PMIs fall further than EM, so it will be interesting to see if EM can outperform during a potential global growth rebound going into 2020.

"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."

EM vs DM manufacturing PMI

3. EM vs DM Equities Relative Performance: This one remains a work in progress. Short-term there's a lot that can happen around that blue line, but longer term I think this one is still one of the key charts for asset allocators to be across (as well as all the other factors, charts, and moving parts that build up the bigger picture around this important theme). Keep this one on your radar.

"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."

EM vs DM equity market relative performance

4. Global Cyclicals vs Defensives: The initial rebound in EM cyclicals vs defensives did indeed help signal and pave the way for better performance from equities, but it was rather one-sided with US equities significantly outperforming the rest of the world, and global ex-US cyclicals vs defensives decidedly more mixed. But just as US cyclicals vs defensives have rolled over in recent weeks, EM cyclicals vs defensives are turning up again after a period of stagnation in H2. Definitely one to keep watching.

"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)."

global cyclicals vs defensives relative performance