Looking back on what is now the longest (US) economic expansion since the 1930s, we note the unprecedented scale of accommodative monetary policy still driving progress. Although asset prices have rallied strongly, in most cases decoupling from fundamentals, GDP growth has remained modest and far from pre-2008 averages. Valuations for most assets are at the upper end of 20-year historical ranges, and, as the business cycle extends further, they will become more sensitive to underlying growth assumptions.
A pick up in volatility is a typical development for a mature stage in the cycle, and this materialized in the Q4 2018 market correction, which was uncharacteristic in speed but not excessive in scope for a late-cycle correction. Looking ahead, our base case macroeconomic scenario assumes the low growth environment will continue, predicated on the assumption that central banks will maintain loose monetary policies. We also expect valuations to come down slightly from their current frothy levels. However, any deviation from this balancing act of fragile top-down fundamentals, low discount rates, and inflated valuations could result in a more pronounced correction in asset prices.
While we believe the global business cycle has further to run on the back of robust private demand and continued monetary policy support, we have lowered our economic growth outlook to reflect the signs of a cyclical slowdown and increased geopolitical uncertainty, including ongoing trade tensions. Slowing capital expenditure and manufacturing activity were two key drivers behind the sharp decline in US and European corporate earnings. Hiring is coming down from strong levels. Growth in China and several other emerging markets has slowed.
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