QMA expects global growth conditions to deteriorate further in the near term, but despite this, sees low odds of a recession.
In the first quarter, financial conditions turned sharply from headwind to tailwind. Developed market central banks turned dovish in Q1, China continued to provide stimulus, and trade tensions eased. Despite the global growth slowdown, QMA projects that the general trend should be up near term, underpinned by central bank dovishness, and reasonably attractive valuations, as detailed in its latest Outlook & Review.
It has been a wild couple of quarters for risky assets, with Q4 and Q1 shaping up roughly to be mirror images. After ending 2018 with weaker momentum, QMA’s outlook highlights their belief that the global economy may slow further in early 2019, given lingering trade uncertainty, a continued slowdown in China, and the lagged impact of tighter financial conditions in late 2018.
Global Economic Outlook
QMA expects global growth conditions to deteriorate further in the near term, but bottom later this year. Despite this, QMA still sees low odds of a recession. The risk of a policy mistake from overzealous tightening looking forward, has greatly diminished since the Fed put its hawkish stance on hold in January and emphasized patience on interest rate policy and increased flexibility on reducing the size of its balance sheet. At the March meeting, the Fed went further, ruling out additional rate hikes in 2019 and announcing that the balance sheet run-off will slow in May and end in September.
In QMA’s portfolios, the top equity allocation remains the US market, but they have also become positive on emerging markets, which could benefit from dovish central bank policies, a stable dollar, lower oil prices, a resolution of the trade disputes, and an eventual rebound of the Chinese economy. In fixed income, QMA has also added risk modestly, shifting to higher yielding assets such as US high yield bonds and emerging market hard currency debt.
After being cautious on small caps since summer of 2018, QMA shifted toward a more constructive view in January seeking to benefit from a relief rally in cyclical assets. With recession fears easing, a shift to a friendly Fed and a more positive investor sentiment, QMA believes that market conditions for small caps have improved.
Read the full QMA Q2 Outlook & Review and more Q2 market outlooks on PGIM.com.
For a media interview with a subject matter expert in QMA’s Global Multi-Asset Solutions Group to speak about market or economic conditions, please contact Judith Flynn.