Brief Macro: Aletheia Capital’s Macro Investment Strategy for 2019 and more

In this briefing:

1. Aletheia Capital’s Macro Investment Strategy for 2019
2. Politics: Unusual UK Unity Promotes Plan B
3. The Eurozone at 20: Will It Survive the Coming Slowdown?

1. Aletheia Capital’s Macro Investment Strategy for 2019

What a tough year 2018 was for emerging markets, in equities, fixed income and currencies. It seems to us that Asia’s fundamentals – whether it be earnings growth, debt vulnerability or external balance – were cast aside as concerns about trade wars, the strong dollar, interest rate rises and ‘liquidity’ took centre stage. In short, 2018 was a risk-off year. What about 2019?

We foresee more growth in the global economy in 2019 even if it is at a slower pace in the US (although a stronger one in China). We are of the view that the US rate cycle has already peaked and that the dollar will weaken as the year progresses. Moreover, we expect funds to focus much more on the relative attractiveness of emerging market valuations, especially in areas where currency and debt vulnerabilities are low.

2. Politics: Unusual UK Unity Promotes Plan B

• The Conservative party and the DUP united in a rare show of support for Theresa May’s Brexit plans by backing her deal, subject to alternative arrangements being included in the Irish backstop.
• A state-dependent break clause still looks like the most likely outcome to me, although pressure to include it in the main text makes it less tolerable for the EU. I still see the probabilities of a deal, no deal, and no Brexit as roughly 55:30:15.
• All other amendments were defeated except one expressing opposition to no deal. Unlike the defeated Cooper amendment, it does not change process, although neither fundamentally affects the direction, despite market optimism it would.

3. The Eurozone at 20: Will It Survive the Coming Slowdown?

The GFC and the subsequent Eurozone crisis served to highlight the fragility and sub-optimal nature of the Eurozone. Recent data suggest that European economies are slowing. The damage both economic and social and therefore political  from the last two downturns has been very severe. Data this week and in coming months could well shift the consensus towards a 2019 European recession. Is it safe to conclude that Europe is just one recession away from the end of the experiment with the single currency?