This Quarterly Outlook shows that short-term return-reversal effects improve momentum outlook with high downside risk.

 

Growing concerns over uncertainties in economic climate

Growing concerns over slowing economic and earnings growth, trade tensions, political uncertainties, and higher policy rates triggered market turbulence and a sell-off in equity markets in the fourth quarter of 2018. At the same time, credit spreads widened significantly. The disappointing equity returns cause expected partial short-term return-reversal effects and improve our momentum outlook on a one-year horizon.

Risk momentum outlook remains skewed to downside

The disappointing equity returns cause expected partial short-term return-reversal effects and improve our momentum outlook on a one-year horizon. We expect the increased volatility to remain present in the short term. Therefore, the positive momentum outlook is accompanied by increased short-term volatility. The risk to the momentum outlook remains strongly skewed to the downside.

Global business cycle in mild contraction phase

Following these market developments, the state of the global business cycle worsened for the fourth consecutive quarter and is now in a mild contraction phase. A contraction phase is characterized by below trend and declining growth and returns. We expect the business cycle to remain below trend on a short to medium term. But it is also very well possible that the market returns to a more optimistic stance, or that market fundamentals will improve, reflecting the uncertainty that is inherent to the future development of economies and financial markets.

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