Q4 investment outlook- The unchartered path

Global growth is slowing but still has further to run
The three main headwinds to global growth - tightening US dollar liquidity, a slowing China and high oil prices - have continued to intensify through the year and should remain in place in Q4. 
Rising trade tensions and related uncertainty could also turn into a more significant drag, a backdrop that is particularly unfavourable for emerging markets.

However, global economic expansion has further to run, as the US economy continues to benefit from its government’s fiscal stimulus and global financial conditions, particularly in developed markets, remain broadly accommodative.

China caught between growth and reform
China’s growth has slowed, mainly driven by a sharp deceleration in infrastructure investment and the squeeze on shadow financing via increased regulation.
The Chinese government has clearly been concerned about the overall direction of its economy, however the relatively small policy easing measures it has enacted are not yet sufficient to engineer a meaningful rebound.

This balancing act of supporting growth with small stimulus on one hand, while pressing on with reform on the other, is a very delicate and difficult tightrope to walk.
It is unclear how much the authorities will be willing to let growth slow. While we don’t expect a hard landing, the risk of a policy mistake that would have serious repercussions for global growth is not trivial.

A double blow for emerging markets
With the US Federal Reserve tightening US dollar liquidity and China slowing, emerging markets are facing a double blow.

The ongoing crises in Argentina and Turkey are all symptoms of the search-for-yield-exuberance created by the global low interest rate environment. This economic stress has the potential to become systemic, spilling over to other emerging markets.

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Asset class snapshot

Equities

Global sectors: Technology, healthcare and financials are our most favoured sectors, while materials is the least favoured.
China: While China’s growth slows, we continue to see many opportunities to invest in good quality businesses that are exposed to consumption, particularly in areas like automobiles and e-commerce. 
Asia Pacific: While the overall outlook has turned more negative, this means valuations look more attractive, especially compared to the US. Developments in China will be critical.
Japan: Above-trend growth is expected to continue, supported by rising capital expenditure and consumption, and valuations are attractive at current levels.
Emerging markets: We expect sentiment to continue to be hindered by tightening US dollar liquidity and US dollar strength, although there are a few notable areas of strong performance, such as India.
US: We expect the recent outperformance of the US to continue for now, driven by strong earnings, robust economic growth and a pick-up in capital expenditure.

Fixed income
High yield: High yield continues to benefit from good earnings momentum, but it will be difficult for credit spreads to tighten further in Q4.
Investment grade: Investment grade debt looks attractive based on momentum and liquidity. However, spreads below historical averages and corporate fundamentals showing late-cycle characteristics warrant caution in some areas.
Emerging markets: Valuations in some parts of the market have adjusted to account for the macro challenges faced by emerging economies.
 

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