“The stock market may be the most profitable asset in 2019, but in a more volatile environment”

“The fiscal year 2018 is proving quite complicated in the financial markets; it is atypical that when the stock markets fall there is no money to be made with the fixed income of governments, as is happening,” explained Joaquín García Huerga during the presentation of the market outlook for 2019 of BBVA Asset Management. “This situation in practice prevents the most conservative portfolios from benefiting from the diversification of their investments in order to weather the turbulence with positive results.”

According to the global strategist of BBVA AM, a first approximation to the general scenario shows that both the structural and cyclical trends of the economies are downwards, due to the ageing of the population and lower productivity growth. But at the same time, the current phase of economic growth still has some way to go. “Although it is true that the cycle shows evident signs of maturity,” he pointed out.

In 2019 there will be less monetary and fiscal stimulus: the former implies less liquidity to support financial assets, and the latter, which is not sustainable, expansive fiscal programs with public debts over GDP at fairly high levels. In addition, the possibility of a trade war between the US and China could damage global growth by about eight tenths and introduce additional instability in the markets. “And within a context of rising geopolitical risks, which is implying higher risk premiums on financial assets, we have to look at the political calendar for 2019: Brexit (and its unknowns), the European Parliament elections in May and the autonomous and local elections in Spain the same month,” said García Huerga.

"If the macro/political environment deteriorates we do not rule out new liquidity-providing operations in the Eurozone"

The probability of a recession in the U.S. is almost nil

In the US, In 2019, BBVA AM expects growth of slightly less than 2.5%, supported by solid consumer spending, but which evidences tighter financial conditions, less fiscal stimulus and deteriorating external demand. And although the cycle in the US is mature, the manager's models say that the probability of a recession in the coming months is almost nil. The forecast is for a stable core inflation, around 2.2%, and only two rate hikes in 2019, compared to the three reported by the Fed.

The Eurozone will also see its growth rate slow to around 1.5%. The upturn in inflation will be slow and core inflation will remain far from 2%, so the ECB will raise the deposit rate no earlier than September/October. “And if the macro/political environment deteriorates we do not rule out new liquidity-providing operations, TLTRO (targeted longer-term refinancing operations),” stressed Joaquín García Huerga.

Modest growth in Latin America

In Latin America, once the electoral uncertainties have been cleared, the implementation of structural reforms and the stabilization of public finances emerge as key factors. In any case, BBVA AM’s growth forecast of less than 2% seems modest for an emerging zone. In Mexico, although it is true that there is some uncertainty about the new economic policy (continuity of reforms and fiscal policy), there are also positive factors: the foreseeable execution of the USMCA trade agreement, very stable consumption, underlying inflation with the prospect of stabilizing and even yielding in the medium term and therefore allowing for a margin to implement a more relaxed monetary policy.

"We think earnings per share growth in 2019 and 2020 will be between 3% and 6%"

Market forecasts

Entering the financial asset outlook, although the end of quantitative stimulus programmes pushes up interest rates, the 2019 outlook points to a ten-year US rate in the neighbourhood of 3%, due to moderate growth and inflation. And for the 10-year German bond rate, the level estimated by the asset manager is 0.6%, again influenced by moderate growth, inflation still far from the ECB’s 2% target and its safe-haven status.

 In credit, the profitability/risk analysis remains unfavourable. Although the recent widening of credit spreads makes the valuation more attractive, the progressive rise in the debt levels of companies and the maturity of the economic cycle give rise to incipient signs of structural asset deterioration. The relative illiquidity in episodes of market turbulence is also a cause for concern. Expected returns are higher in the US than in Europe, both in local and hedged currencies.

“And if we look at the stock markets, we think earnings per share growth in 2019 and 2020 will be between 3% and 6%,” notes García Huerga. These figures are modest for the following reasons: lower economic growth, stable margins, threat of trade war and oil within a certain range or something weaker. The context of macroeconomic deceleration and greater geopolitical risk is reflected in higher risk premiums, which are also evident in other markets such as credit.

“We therefore value stock exchanges with a PER between 1.5 and 2 points lower than a year ago. In 2019 we expect an average stock market rise of 6%, and only if we add the dividend yield, do we reach figures of 10%,” he says. The range of possible scenarios has increased for 2019 and therefore the final result is more uncertain. “Even so, if, as we think, the economic cycle does not fail, the stock market may be the asset that offers the most profitability for the year as a whole, but possibly within a volatile market environment. This volatility, in a context of high geopolitical uncertainty, makes it advisable to manage stock market investment levels more dynamically, paying attention to market risk conditions.

Finally, after the dollar’s good year, it is relatively overvalued with respect to its level of equilibrium. With unemployment in the US being already very low and a rate differential against other countries that is slowing down its pace, it is possible to put an end to the appreciation of the dollar against other currencies. “At the crossroads with the euro, our valuation model shows us it is in the neighbourhood of 1.18.”