The need for selectivity among investors will be in greater focus in 2019, according to PineBridge Investments (PineBridge), an investment manager with USD91.4 billion in assets under management.
“Heading into 2019, global macroeconomic uncertainty continues to rise and the spectre of disruption, whether it be from geopolitics, technological innovation, or business investment, is becoming more real than ever,” says 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.”
PineBridge’s 2019 Global Investment Outlook, “Rising Above the Business Cycle,” outlines the firm’s view on the opportunities and risks for investors in the year ahead. In it 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 per cent in 2019 and 3.4 per cent in 2020. For North America GDP, 2.4 per cent in 2019 and 2.0 per cent in 2020; for Europe GDP, 1.9 per cent for 2019 and 1.7 per cent for 2020; and for Asia GDP, 5.5 per cent in 2019 and 5.3 per cent in 2020.
PineBridge writes: “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 firm says its 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 capitalisation 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.
According to PineBridge, the key risks in 2019 stem from rising input costs globally due to labour 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 utilisation of capacity,” says Anik Sen (pictured), 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.”
While PineBridge’s Fixed Income team believes markets will largely remain favourable 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 dialling down risk across and within asset classes,” says 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 normalisation, 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,” says 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 emphasise liquid, as opposed to private or passive, investments in order to make portfolio adjustments as events unfold and put capital to its best use.
