OpinionAs the US and rest of the world diverge economically, what does 2019 have in store for global investors?

This was the year the global environment diverged as the United States powered ahead while the rest of the world stumbled. Looking ahead, tighter financial conditions, a slight dip in European growth, some idiosyncratic emerging market stumbles, the deleterious worldwide effects of a stronger US dollar and trade tensions all threaten to spill over into 2019. The question facing investors is whether fundamentals are strong enough to steady global markets and whether current asset prices sufficiently discount solid, though weaker, fundamentals and risks to the global outlook.

Global growth is still positive for developed economies. While China and Europe will slow further, the US will remain the consumer of last resort, powering the global economy. Several emerging markets, such as Turkey, have experienced weakening external funding vulnerabilities, but there has been no contagion to other emerging economies and pockets of strength persist.

Global inflation expectations are well anchored in the developed economies, lessening the chance of inflation spikes. While the Federal Reserve is likely to raises interest rates twice, there may not be a third hike. In addition, lower average employment across the G7 is not leading to corresponding wage gains and rising inflation. As a result, there’s no reason to expect a spike in long rates.

The European Central Bank (ECB) may choose to push back its first rate hike since the global financial crisis to late 2019 or even early 2020. The US dollar could creep higher, but any Fed pause or Brexit clarity in Brussels would put a halt to its march. Therefore, the worldwide market sell-off in 2018 presents an opportunity in risk assets, and bonds will remain negatively correlated with equities, allowing standard multi-asset portfolios to perform. While risk assets may not appreciate as steadily as in the recent past, the firm global backdrop will ultimately support asset prices.

Despite this, greater market volatility is in store as the risks to this constructive scenario come from trade tensions, global tightening of financial conditions and fears about debt sustainability and banking stability in Italy.

The US trade war with China is deepening. Donald Trump’s administration is honing in on China’s forced technology transfer, surveillance of foreign businesses and President Xi Jinping’s plans for Made in China 2025, a direct threat to US technological domination. These issues are unlikely to be solved quickly, so expect 25 per cent tariffs to be placed on all Chinese imports in early 2019. The US can withstand this pressure in the aggregate, but the Chinese economy will feel the pain. As worldwide trade contracts, Europe and emerging markets will be affected as their growth is more dependent on global demand.