Outlook 2018: A Complex Equities De-Rating

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Apr 26 2018

In this week's Weekly Insights (published in two separate parts):

-Outlook 2018: A Complex Equities De-Rating
-Slowing Growth, Rising Yields, High PEs
-Conviction Calls
-Australian Banks: Cheap, But Value?
-Rudi Talks
-Rudi On TV
-Rudi On Tour

[Note due to ANZAC public holiday the non-highlighted items appear in part two on the website on Friday]

Outlook 2018: A Complex Equities De-Rating

By Rudi Filapek-Vandyck, Editor FNArena

Last week's disappointing labour market data released by the Australian Bureau of Statistics mark an important new development for calendar 2018, and an additional complication for global financial markets; economies are slowing down, with synchronised momentum having peaked late last year.

While it remains too early to start worrying about the next recession or global bear market for risk assets, slowing economic momentum when the Federal Reserve remains intent on further tightening ("normalising") US interest rates is not a favourable combination, to put it mildly. This new framework increases the chances for ongoing sharp volatility in markets, if not a much larger draw down in case investor sentiment suffers yet another blow.

Slowing global growth should definitely be on investors' watch as it has the potential to change existing trends, potentially reversing fortune for the US dollar, while keeping a lid on inflation expectations, on 10-year bond yields, and potentially on central banks intentions for the year ahead.

Below are some of the charts that have caught my attention recently.


First up, economic data have been, on balance, underwhelming over the past 2-3 months, suggesting a global synchronised loss in economic growth momentum is upon us. Nowhere has this slowing in growth momentum shown up as pronounced as it has in the eurozone.

Against this backdrop, respected newspaper columnist Ambrose Evans-Pritchard warned in the Financial Times last week about the German economy potentially heading for a recession. Others have been issuing similar warnings for the US in 2019, but the latter economy, while losing momentum too, currently still looks one of the most resilient worldwide.


Global manufacturing is losing momentum, and leading indicators are suggesting the weakness is likely to extend into the six months ahead, if not longer. Here investors should bear in mind several PMI indices had previously surged above 60, suggesting almost overheating industry conditions.

Economists, such as those at Danske Bank, are merely anticipating conditions for manufacturers worldwide are now heading towards a more moderate growth framework, maybe with China's PMI index sinking into negative territory again (below 50) by year-end. The underlying suggestion here is that momentum for global manufacturers, while slowing markedly, should remain positive throughout the remainder of this calendar year.

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