AUTHOR: Keith Wade, Chief Economist, Schroders
2018 was a challenging year for investors with US equity and government bond markets both returning less than cash. Two factors were instrumental in delivering this outcome: disappointment with global growth and less cash flowing through the global economy (tighter liquidity).
These factors will continue to influence markets in the year ahead. Here we discuss four “black swans” – events that are plausible but not currently being given much weight by markets. They are the “unknown unknowns”. By definition, we cannot anticipate them but we have identified four scenarios that are plausible. We think they are worth consideration.
1. Another eurozone crisis
The first eurozone debt crisis began in 2009 and saw several eurozone member states (most notably Greece) become unable to repay (or refinance) their debts. A number of countries were also unable to bail out over-indebted banks. The European Central Bank (ECB) stepped in, effectively printing money to ensure the markets continued to have access to cash, thereby preventing a suspension in activity and possible economic collapse.
Since then, there has been a call, from President Macron in particular, for the creation of a central fund to support growth should such events arise again. This has yet to be formed. A potential new crisis was only narrowly avoided at the end of 2018 when the spending plans of the new populist Italian coalition government tested the strict guidelines of the European Commission. Such drama is likely to play out again in 2019 given the broader rise of populist politics.
2. No Brexit in Europe
This may seem inconceivable given the time and energy currently being poured into sorting a withdrawal agreement. However, ‘no Brexit’ is the only outcome that will not require a vote (apart from ‘no deal’). As MPs have rejected the current deal on offer, and the EU unlikely to concede anything further, there must be a possibility that the government cancels Article 50 and stays in the EU.
3. Military action
Sadly, there are plenty of hot spots that could ignite in 2019. The proxy war in the Middle East (being fought in Yemen and Syria) could become an actual war between Saudi Arabia and Iran. China has ambitions for Taiwan and across the region. The recent departure of defence secretary James Mattis indicates a more isolationist US, creating opportunities for others to fill the void. If President Trump’s dismissal of the UN’s function leads to a less co-ordinated international response to territorial skirmishes, Russian ambitions could re-escalate.
4. Trump does not run for re-election in 2020
Although it is often difficult to read the president’s intentions, he appears to be constantly campaigning and setting himself for a second term. However, he will have to see off US Special Counsel Mueller’s investigation into alleged Russian interference in the 2016 election first. Furthermore, he is already the oldest person to be elected president, taking office at the age of 70 and would be 78 if he served a whole second term. Health may be a factor. Or, he could simply decide to do something else: there has been talk of him founding a media empire – Trump TV anyone?
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