“Low visibility means that we are only able to assign a 55% probability to our core macro scenario.”
After a difficult year for markets in 2018, with very few asset classes posting positive returns, we anticipate that 2019 will be a year when the “three amigos”— consisting of a bear, a bull and a kangaroo—stake out their territory in financial markets. In other words, we expect plenty of ups and downs—but also think that investors sufficiently smart to exploit volatility spikes will, like a kangaroo, be able to bounce ahead.
In the 2019 special edition of Perspectives, César Pérez Ruiz, Pictet Wealth Management’s (PWM) Head of Investments & CIO, explains why he is not afraid of volatility. While “we can be reasonably sure that 2019 will bring the return of a more standard volatility regime, with intermittent spikes, he writes. ”We do not believe [that this] is necessarily a bad thing. Volatility offers opportunities for tactical investors who are agile and flexible enough to adapt to fast-changing conditions, like the kangaroo.”
In 2019, Pérez Ruiz expects global economic deceleration, but no recession. Inflation is on the rise and central banks are becoming less predictable, while “political risk …will continue to play a major role in markets,” he writes. In this uncertain environment, Pérez Ruiz advocates bottom-up stock selection, favouring “companies with structural growth drivers and pricing power as well as low leverage. And as rates move higher, we prefer dividend growers to dividend earners.”
Pérez Ruiz believes that after a difficult year, “emerging market equities will come back in favour, particularly in Asia,” with signs emerging that “a long period of underperformance is coming to an end, as valuations start to look more attractive in light of earnings potential.”
Christophe Donay, PWM’s Chief Strategist and Head of Asset Allocation & Macro Research, believes that “the jolts markets suffered in 2018 could be the expression of a transition toward a new market and economic regime” and that this change could also impact equity valuations, which could remain “stuck below the high levels reached between 2016 and early 2018.” With this shift taking place against a backdrop of such low visibility, Donay writes that he is “only able to assign a 55% probability to our core macro scenario for 2019,” considerably lower than in previous years.
These considerations mean we have become more active in our tactical approach and have been adapting our strategic asset allocation,” according to Donay. Focus on quality will be key to investing this year, he believes, while “the relatively uninspiring prospects for 60/40 portfolios (60% equities, 40% bonds) also mean we have moved more decisively to include private assets in our strategic allocation.”
Following the private assets theme, Pictet Alternative Advisors’ Global Head of Real Estate, Zsolt Kohalmi, is bullish about the investment prospects offered by real estate, particularly where the direct investor can add value to the original investment. “Demographic trends are reshaping the way we use real estate today, leading to new opportunities in the sector,” according to him, holding out the possibility of long-term risk-adjusted returns that are largely uncorrelated with equities.
Despite elevated uncertainty, Alexandre Tavazzi, PWM’s Global Strategist, thinks there are grounds for measured optimism. “Far fewer stocks were trading above their 200-day moving average at the start of 2019 than one year before,” while “emerging markets have been closing their performance gap with developed markets,” he points out. And 2019 could prove a more positive year for emerging market returns.