2019 around the world: A survey of country risks

As my colleagues in the BlackRock Investment Institute make clear in the new 2019 outlook, markets are moving into a more challenging phase. We see slower global growth and corporate earnings in 2019, while the U.S. economy approaches the late stages of the business cycle. The bottom line is that balancing risk and returns is getting harder and we believe investors should consider building resilience into their portfolios.

That means identifying the risks ahead of time and planning appropriately is more important than ever as investors plan for the year ahead. The year 2018 was filled with geopolitical events that impacted markets, a trend likely to continue in 2019. However, valuations have reset and risk premiums are higher this time around. Being selective, as always, is key.

Here is a survey of some of the key risks facing markets around the world. I’ve organized them by geopolitical risks and economic, namely the challenges faced by slowing global growth.

Geopolitical:

United Kingdom: Approving a Brexit deal will dominate the first quarter of 2019, after which the focus will then shift towards the transition period that will last until the fourth quarter 2020. March 29, 2019 marks the two year anniversary of triggering Article 50 and is the deadline for a deal. We expect volatility to remain high beyond the March deadline; in our base-case view, we see U.K. GDP growth remaining anemic at less than 1.5% with meaningful downside risks. Earnings growth is expected to remain below peers as well, with just 7% earnings growth forecasted for 2019. [1]

Mexico: Policy uncertainty remains elevated following the Mexican elections. Andres Manuel Lopez Obrador’s decisive victory as president has given his administration a clear mandate for change, and he has congressional backing to enact reforms. However, after AMLO cancelled the Mexico City airport project, investors are reconsidering just how significantly policy could shift. Top of mind is the risk of deteriorating fiscal discipline, as fiscal health is needed to maintain sovereign ratings and support domestic and external confidence. Absent policy errors, Mexican assets look reasonably attractive. Analysts currently expect 16% earnings growth in 2019 and USD/MXN and equity valuations appear quite cheap.[2]

Italy: Italy’s growth slowed sharply in 2018 and we see more downside ahead. Political uncertainty has weighed on business and consumer confidence, while the budget proposal and battle with Brussels has raised borrowing costs and tightened financial conditions. Given Italy has one of the weakest potential growth rates among EU members at just 0.5%, debt sustainability concerns will remain and any fiscal stimulus measures that lack structural reforms will likely tighten financial conditions, offsetting any fiscal impulse.

Slowing global growth:

Japan: A number of forces will challenge Japanese growth in 2019. External demand will weaken due to slower Chinese and U.S. growth and from trade uncertainty with the U.S. Domestic demand will likely peak in the third quarter of 2019, ahead of the October VAT hike. We expect the Bank of Japan (BoJ) to remain accommodative, however any changes could lead to yen appreciation and further undercut export growth. Japanese equities are already cheap relative to history, but 2019 earnings growth expectations are weak (4%) and economic risks look skewed to the downside.[3]

Korea & Taiwan:  Korea and Taiwan are likely to see weakening external demand as global growth slows, but they both must also deal with a slowing semiconductor cycle. Already in Nov 2018, South Korean exports declined from 23% year-over-year to 5% as chip exports sharply weakened to two year lows.[4] Unless the semiconductor cycle gets a major reboot in 2019, Korea and Taiwan will face a daunting external demand backdrop that’s unlikely to provide strong earnings growth.

International investing may have been out of favor in 2018, as many markets outside the U.S. struggled. However, that can change in a flash, and it is important to remain diversified including by maintaining international exposure. It is important to note, as my colleague Russ Koesterich described, emerging markets outperformed developed markets during the recent volatility.

We continue to favor emerging markets, but the trade-off of risk and reward is even more challenging than usual. Within emerging markets, we favor China, India and Brazil. Still, each has its own political risks and can be we impacted by slowing growth, although we believe the positives outweigh the negatives. The key for investors is to be selective, and keep a keen eye on political and economic risks.

Related iShares funds

EWU – iShares MSCI United Kingdom ETF

EWW – iShares MSCI Mexico ETF

EWI – iShares MSCI Italy ETF

EWJ – iShares MSCI Japan ETF

EWY – iShares MSCI Korea ETF

EWT – iShares MSCI Taiwan ETF

MCHI – iShares MSCI China ETF

INDA – iShares MSCI India ETF

EWZ – iShares MSCI Brazil ETF

Chris Dhanraj is the Head of the iShares Investment Strategy team and a regular contributor to The Blog.

[1] Source: Thomson Reuters, as of 12/5/2018, based on analyst expectations of earnings growth of the companies represented in the MSCI United Kingdom Index. [2] Source: Thomson Reuters, as of 12/5/2018, based on analyst expectations of earnings growth of the companies represented in the MSCI Mexico Index. [3] Source: Thomson Reuters, as of 12/5/2018, based on analyst expectations of earnings growth of the companies represented in the MSCI Japan Index. [4] Source: Bloomberg, as of 12/5/2018. Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries. This material represents an assessment of the market environment as of the date indicated; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular. This document contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc. ©2018 BlackRock. iSHARES and BLACKROCK are registered trademarks of BlackRock. All other marks are the property of their respective owners. ICRMH1218U-688971-1/1

source https://www.blackrockblog.com/2018/12/21/2019-world-survey-country-risks/