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2019 Outlook: Preparing for the downside, part 1

Global growth will be slower in 2019, volatility will remain on a par with 2018 but the risk of recession is low – according to some of Europe’s leading asset managers.

IPE has analysed investment outlooks from a number of major firms, including DWS, BlackRock, State Street Global Advisors (SSGA), and Invesco.

Investment managers’ forecasts for 2019 make for varied reading, with strong consensus in some areas but variety of forecasts in others.

The UK’s exit from the EU in March, ongoing Italian budget negotiations, and the US-China trade conflict are common themes predicted by many managers to pose risks in the year ahead.

“Growth peaked in 2018, but the fundamental data remain solid,” says DWS chief investment officer Stefan Kreuzkamp, while cautioning that “there are a whole series of risks to the bull market”.

US-China trade war

The trade conflict is a focal point for investors everywhere, with varying degrees of concern as to its impact – though few argue that market fears are overdone.

Rick Lacaille, SSGA

Rick Lacaille, global CIO, State Street Global Advisors

Rick Lacaille, global CIO at SSGA, says: “One can only hope that cool heads prevail, since the potential costs of a downward spiral in retaliatory measures are high.”

Thomas Donilon, chairman of the BlackRock Investment Institute (BII), highlights that it’s about more than just trade.

“The US believed once China secured more wealth, it would embrace western values,” he says. “The Chinese thought Trump was a dealmaker and they could adjust at the margins. Both misread.”

He adds that a further escalation could disrupt global supply chains, put pressure on corporate margins and hurt market confidence.

US equity markets

Most forecasts prefer equities to fixed income, especially in the US – although most predicted returns are far more modest than a year ago. The hit equities took from global trade tensions in 2018 was despite solid earnings growth, says BII’s Donilon, adding that, although the group’s conviction is tempered, it still prefers quality stocks generating cash flow, sustainable growth and with clean balance sheets.

Over 2018, French asset manager Comgest reduced several stocks, according to portfolio manager Zak Smerczak – some of which had been held in its for over a decade. The reductions were prompted by a more uncertain growth trajectory, as well as the stocks in question being expensive on historical relative value terms, particularly some IT and industrial automation names.

Stock markets

However, Smerczak remains upbeat that rigorous bottom-up searching can yield enough “visible, stable and compounding growth investments, for long-term investors, irrespective of location or industry”.

Unigestion’s multi-asset team’s outlook report advises realism about 2019. “Current analyst expectations for annual US earnings growth, at around 8%, seem a bit optimistic, given the median since 1980 has been 7%,” the report says. “There is a clear pattern of analysts revising their expectations down as time progresses, which additionally points to likely disappointment ahead.”

Mark Burgess, deputy global CIO at Columbia Threadneedle Investments, says: “As value chains continue to evolve, traditional business models are challenged, and technology comes of age, those companies that are able to innovate should continue to grow.”

Pictet’s chief strategist Luca Paolini is more cautious on equities globally, citing profit margins under pressure primarily from rising wages and higher debt servicing costs. He warns global returns could be “negligible to flat”, with US losses offset by gains elsewhere.

Nick Mustoe, Invesco CIO, is similarly downbeat on the US outlook.

Nick Mustoe, Invesco

Nick Mustoe, CIO, Invesco

“The US equity market has never been more expensive compared to other regions, skewed by technology stocks,” he says. “Facebook, Amazon,  Apple, Netflix, Microsoft and Google’s parent company Alphabet have contributed around two-thirds of global equity returns so far this year. In our view that isn’t sustainable.”

Non-US equities

Columbia Threadneedle’s Burgess forecasts US growth moderating during 2019, with “the relatively good economic growth generated in Europe to continue”.

“We continue to hold a positive stance towards European, Asian and, particularly Japanese equities,” he adds.

Pictet’s Paolini concurs: “Japan could be another bright spot thanks to its attractive valuation, political stability, low corporate leverage and the yen, which tends to appreciate when risk aversion rises.”

Investec Asset Management’s head of multi-asset income John Stopford adds: “The Japanese yen stands out as being significantly cheap and offering naturally defensive behaviour if equities crack, thanks to Japan’s status as an international creditor.”

In Europe, the prospect of Brexit at the end of March garners fairly negative UK comments. However, Pictet’s Paolini suggests that the UK is now one of the cheapest markets.

Investec’s Alastair Mundy, UK equities manager, adds that, “typically when investor sentiment is this extreme, pricing anomalies occur”, meaning low prices are now available on some companies able to generate profits through the cycle.

Part 2 will be published tomorrow, looking at fixed income and other asset classes

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