State Street Global Advisors, the asset management business of State Street Corporation (NYSE: STT) has today published its 2019 Mid-Year Global Market Outlook, providing a medium-term forecast for global markets. While trade risks have come sharply into focus in recent months, we continue to see room for moderate global economic growth given the Fed’s more accommodative policy stance.

“Looking back over the last year, we can see that the biggest lesson is to look through the noise and to focus on where fundamentals might take us over the longer term,” said Rick Lacaille, global chief investment officer at State Street Global Advisors. “We see potential for the economic cycle to extend, especially in the US where there is considerable momentum, but continue to monitor trade developments carefully.”

“First quarter growth in the US and globally was not as bad as feared and, while wage inflation has risen, inflation overall remains manageable,” commented Lori Heinel, deputy global chief investment officer for State Street Global Advisors. “Last December, markets became overly concerned about the outlook for global growth, thanks to the impact of the US-China trade conflict and what many saw as the Fed’s overly hawkish tightening schedule. Today trade risks persist, but the policy stance has shifted.”

Equity market growth should continue, with spikes in volatility

Macro factors should, therefore, continue to support earnings growth but investors need to be cautious as volatility could easily spike given the significant geopolitical and growth risks facing the global economy.

“We remain overweight equities amid significant policy support but believe that investors should maintain a defensive bias as fundamentals disconnect from returns and trade risks mount,” said Bill Street, head of Investments EMEA at State Street Global Advisors. “Equity valuation multiples relative to the length of the current cycle (longest on record), and past cycles, should prove justified if trade risks moderate and earnings growth comes through towards the latter part of 2019.”

China and India drive growth despite trade risks

Rising protectionism from developed markets such as the US remains an important risk for emerging markets. But State Street Global Advisors believes that the growth stories of two of the largest countries – India and China – continue to offer opportunities for investors in both the equity and debt space.

“Emerging market equity valuations relative to other regions are at all-time lows, while earnings per share and sales forecasts are holding up well,” highlighted Kevin Anderson, head of Investments in the Asia Pacific region at State Street Global Advisors. “We think emerging markets are attractive and the long-term growth story is intact although risks remain with the ongoing US-China trade dispute. For fixed income investors, higher-yielding emerging market debt should drive long-term returns despite local currency volatility in the short run. Overall, the stabilization of the Chinese economy is also positive for emerging markets.”

Climate risks increasingly salient among investors

Climate-related investment risks have moved up the agenda in 2019, with a broader discussion of how climate change may have potentially systemic effects on financial markets and threaten business models and long-term asset values across a range of asset classes and sectors. “At State Street Global Advisors, we have developed new tools to identify and monitor climate risks at a security level and new strategies for investors to mitigate their climate exposures to take advantage of new opportunities,” said Rick Lacaille, global chief investment officer at State Street Global Advisors.

To see State Street Global Advisors’ full 2019 Mid-Year Global Market Outlook content, visit ssga.com/GMO.