SINGAPORE (Nov 22): Global growth is expected to moderate as stimulus tailwinds weaken and output gaps close but tactical opportunities can still be identified in unfavoured assets and emerging markets, says T Rowe Price Group Inc in its outlook for 2019.

The global investment manager with US$1.01 trillion ($1.4 trillion) in assets under management expects global growth to slow a bit in 2019, although fiscal stimulus will still provide a tailwind.

“History suggests that we will see another 175 basis points of rate hikes, and Fed tightening cycles should lift the real Fed funds rate at least to potential real GDP growth. In terms of risk, we see that the yield curve is flattening, but this does not mean recession is imminent,” says Alan Levenson, chief US economist at T Rowe Price.

For global equities, the investment manager is also cautiously optimistic in the year ahead.

“Economic acceleration, high consumer and business confidence, strong earnings growth, the electoral cycle, and widespread innovation all favour a bull market in the near term. However, we will likely see a market tug of war, which should favour investment strategies that are opportunistic and focused on stock selection,” says John Linehan, the firm’s chief investment officer, equity, and portfolio manager.

Compared to developed markets, emerging markets have underperformed by a wide margin this past year and several themes support the “bear” case scenario.

Firstly, the rising dollar and rising rates are headwinds for emerging markets, and country-specific risks could trigger broader contagion. In addition, trade tensions have the potential to derail Chinese and global growth.

However, T Rowe Price is on the lookout for factors that could be upside surprises in 2019, This includes innovation in China, rising profitability in Japan, and a possible Brexit resolution.

For Asia ex-Japan equities, positive earnings growth is expected to continue through 2018-2019, albeit at much slower rate versus 2017, says Anh Lu, portfolio manager for the Asia ex-Japan equity strategy.

Firstly, valuations are attractive again relative to long term history and relative to developed markets and the risk of demand slowdown due to deleveraging in China and trade war tensions has already been significantly reflected in share prices.

“We expect some policy fine-tuning in China to accommodate economic growth and private sector investments should trade war tensions continue to rise over the next 6-12 months. Elsewhere in Asia, currencies and local rates have made most of the necessary adjustments to reflect stronger US dollar and rising USD rates,” says Lu.

In general, Lu prefers companies that are successfully boosting their innovation capabilities in the areas of healthcare, automotive, home appliances, robotics, environment, and other consumer applications.

“We continue favouring companies that are gaining more market share and those that will benefit from pricing power and industry consolidation. We see value in companies with improving fundamentals due to capital expenditure discipline,” adds the analyst.