High-Conviction Opportunities Emerge From Rising Dispersion Among Assets
NEW YORK & LONDON & HONG KONG--(BUSINESS WIRE)--Nov 14, 2018--The need for selectivity among investors will be in greater focus in 2019, according to PineBridge Investments (“PineBridge”), a leading global investment manager with US$91.4 billion in assets under management. PineBridge today released its 2019 Global Investment Outlook, “ ,” outlining the firm’s view on the opportunities and risks for investors in the year ahead.
“Heading into 2019, global macroeconomic uncertainty continues to rise and the specter of disruption, whether it be from geopolitics, technological innovation, or business investment, is becoming more real than ever,” said Greg Ehret, CEO of PineBridge. “These dynamics are leading to rising dispersion among assets, underscoring the need for investors to be highly selective across asset classes.”
Highlights from the 2019 Outlook include:
Markus Schomer, Chief Economist, expects the key macro theme next year will be re-convergence of global growth rates, but there are several “ifs”:The Fed can successfully soft-land the US economy if policymakers can resist the temptation to push real policy rates through past levels of neutral. China can reverse the negative impact of US tariffs on Chinese goods and stimulate private sector growth, benefiting exporters around the world, if policymakers can diversify the range of tools used in that effort. The ECB can set off a broader re-convergence in developed world central bank policy if the EU can mitigate the potential negative economic effects of Brexit, the Italian budget standoff, and the 2019 election.
The PineBridge Economics team also examines whether China can avoid a hard landing; identifies the stumbling blocks in Europe; and notes the continued emergence of political hotspots. Global GDP growth forecasts are 3.6% in 2019 and 3.4% in 2020. For North America GDP, 2.4% in 2019 and 2.0% in 2020; for EuropeGDP, 1.9% for 2019 and 1.7% for 2020; and for Asia GDP, 5.5% in 2019 and 5.3% in 2020 .
The pace of change in both earnings revisions and company revenues suggests we are earlier in the cycle than many believe. The PineBridge Equities team also has reasons for optimism on China, expecting the country to strike the right balance between increased regulatory supervision and offsetting relaxation measures. Going into 2019, PineBridge sees opportunities in emerging markets – notably Asia ex Japan, China, India, and Latin America – as well as in select companies globally that have pricing power and the ability to protect their margins in a period of rising input costs.
The Equities team sees good growth potential in revenues and in the margins of companies that are producers and users of smart capex, both in the technology and industrials sectors and, more broadly, where companies are benefiting from higher investment spending. Smaller capitalization stocks have underperformed significantly in 2018, and through a selective approach, the team is finding attractive opportunities, most notably in Japanese automation stocks, consolidating industries, and companies with better corporate governance.
The key risks in 2019 stem from rising input costs globally due to labor shortages, higher commodity prices, and the rising cost of capital. Few companies have the pricing power to be able to protect their operating margins in such an environment.
“Our focus is on selectivity, and we are paying particular attention to both a company’s market position and its management’s ability to protect margins through investments in technology for more efficient utilization of capacity,” said Anik Sen, Global Head of Equities. “Above all, with stability returning to China’s growth, we see many of the good demand conditions of 2017 repeating in 2019 as a global convergence of growth creates a positive environment for select investment opportunities.”
Going into 2019, fixed income investors should review their portfolios to prepare for the possible emergence of the following trends:Global rate normalization A trail-off in US monetary tightening Less favorable US technicals Lower returns, greater volatility, and wider dispersions
While the Fixed Income team believes markets will largely remain favorable in 2019, negative forces can emerge quickly and unexpectedly. Steven Oh, Global Head of Credit and Fixed Income, notes that in this environment investors should consider paring back riskier credits and rethinking US Treasury allocations, while taking a closer look at emerging markets and de-risking selectively.
“Given what the future is likely to hold, we do not believe it pays to dive into the riskiest parts of the market at this time. In fact, it now appears prudent to begin marginally dialing down risk across and within asset classes,” said Oh. “This slightly defensive tilt should help investors better navigate anticipated cycle changes of expected lower returns, greater volatility, and a return to global rate normalization, while being prepared for rising risk levels should unexpected tail events emerge.”
An important shaper of 2019 will be China. While China’s slowdown currently is deepening and PineBridge’s Multi-Asset team sees more downside than most into spring 2019, given the belated, yet now aggressive, policy response the team sees China reviving by the second half of 2019. This will be of particular relevance to Europe and many emerging market countries, which are experiencing the brunt of China’s downturn. In addition, forces such as corporate profits, the Fed’s pause on interest rates, a loosening up of the oil picture, and the wild card of US-China tensions will also shape the year ahead.
“Despite recent turbulence, we are still of the mind that growth assets – a subset of risk assets whose cash flows grow somewhat faster than average when growth and pricing power pick up – will be the primary beneficiary of the current reflation of confidence and growth,” said Michael J. Kelly, Global Head of Multi-Asset. “Being increasingly concerned by pockets of lower quality credit and the narrowness of spreads, we see more potential in taking enterprise risks from here on in the form of equities, where cash flows can grow, rather than in credit, where they cannot.”
Stepped-up investments in productivity should not only elongate this cycle, but also contribute to a more disruptive environment for many of today’s established business models. Within such an environment, when winners and losers become widely dispersed, the team prefers to emphasize liquid, as opposed to private or passive, investments in order to make portfolio adjustments as events unfold and put capital to its best use.
PineBridge Investments is a private, global asset manager focused on active, high-conviction investing. The firm draws on the collective power of our experts in each discipline, market, and region of the world through an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’ expectations on every level, every day. As of 30 September 2018, the firm managed US$91.4 billion across global asset classes for sophisticated investors around the world.
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SOURCE: PineBridge Investments
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PUB: 11/14/2018 06:00 AM/DISC: 11/14/2018 06:00 AM