However, while financial markets remained attractive, monetary policy normalisation combined with near historically high equity valuations, near all-time low bond yields, and record tight credit spreads soon led investors to expect more modest performances and heightened volatility. Although markets promise to hold up in 2019, the landscape is starting to look patchy: we believe that desynchronisation between economies will be the dominant theme in the coming year.
The US remains ahead in the economic and monetary cycle, driving strength in the dollar. Europe has finally managed to break out of its post-crisis deflation, but the continent’s recovery is sluggish and its growth pattern fragmented. As for emerging markets, they have dislocated with Asia remaining on track, while Latin America, Eastern Europe and the Middle East are all seeing sharp dispersion.
Amid a tense geopolitical climate, especially in Europe and the Middle East, this desynchronisation is impairing visibility and heightening risks. Meanwhile central banks’ policy tightening is going to put pressure on longer-term yields and fresh trade tariffs may be on the cards for China and perhaps for European and Japanese carmakers too.
Our risk-focused approach has enabled us to seek short-duration exposure to weather the sell-off in bonds throughout 2018 while a rotation to non-corporate credit solutions has provided shelter from the volatility across fixed income markets. For 2019 we are maintaining our short-duration exposure on the US market. Investors should tread carefully in Europe, although given the region’s three-year lag its bond markets should see repricing and curve-steepening.
With modest return prospects across traditional asset classes in 2019, we encourage investors to reposition tactically across both structured products and hedge fund strategies to contain downside risk in this period of rising volatility.
Corporates now face growing cost pressure and more limited earnings growth. Capital-protected equity exposure helps shield against mounting uncertainties. Our preference has moved away from the energy sector and focuses on bottom- up innovation, not only in technology, but also in the healthcare sector. Strategically, investors have an opportunity to shift their focus while at the same time stretching time horizons and to lean more heavily on secular trends and company analysis to add value. In particular, impact investing should continue to grow as millennial investors enter the market.
Co-CEO Asset Management & Group CIO