1. What is your investment outlook for global equities in 2019?
Going into 2019, I remain cautious on the outlook for global equities, in view of the risks in the current late-cycle environment. Tightening US monetary conditions, global trade frictions, slowing Chinese growth, Italy’s debt problems and rising interest rates at a time of higher corporate indebtedness, present headwinds to the global economy and equity markets.
So far, the trade tensions and rhetoric around US-China relations have disproportionately impacted emerging market equities. However, the inter-linked global value chains mean that bilateral trade tensions between the world’s two largest economies could have global ramifications. Add to this rising crude oil prices, which are primarily driven by supply distortions in Iran and Venezuela, are also weighing on oil-importing economies, and this calls for additional caution.
Within Europe, the market has punished Italian equities and government bonds for the country’s debt-laden budget, and we could expect more volatility as negotiations with the European Commission continue. All of these issues are interdependent, as the path of the oil price in some cases drives the path for bond yields and emerging market currencies. What is making things more complex is that price signals are increasingly spurious, as they are driven by algorithms and ETF trading.
Nonetheless, a late cycle is still positive for risk assets, and increased market volatility can create interesting dislocations and offer interesting buying opportunities to add value.
2. What do you think could most surprise investors next year?
The super bearish case for global equity markets would be the further acceleration of ongoing trade wars - and it seems to me that trade and defence are two sides of the same coin.
Trade uncertainty lasting for longer could become a drag for investment, and would be very negative for investors. But I also believe that this would force Chinese authorities to push even more aggressively towards a stimulus scenario to counter the effects of a slowdown in its economy.
How China’s stimulus plan would translate into actual impact is unclear, as it depends on the monetary and fiscal stimulus size, given the constraints of moving from surplus to deficit on the current account.
On a positive note, the bullish case for global markets involves oil prices coming down and the US Federal Reserve suggesting that it would take a pause and watch data due to uncertainty from trade-related disputes. With rising raw material costs and wage pressures, the Fed needs to start cutting rates or suggest that it is done. This would be an extremely Goldilocks-positive scenario (good for growth stocks and bad for value stocks). It could also be the time to buy defensives.
3. How do you plan to capture the best opportunities?
The flattening yield curve and extended debt levels are giving us reason to be careful, however the strong corporate earnings growth and still tight credit spreads suggest room to run for equity markets. Although absolute valuations don’t give you a sufficient margin of safety, on a relative basis compared to fixed income markets, equities remain attractively valued.
The current market scenario seems to be where one needs to tread cautiously in terms of portfolio construction, with greater emphasis on finding stocks that lose less, rather than gain more.
Our global equities portfolio is well-diversified across a range of industries and sectors, with no regional and sector bias. Our focus remains on bottom-up stock picking, so the regional weightings of the portfolio are not necessarily a reflection of our top-down view of the markets.
US and Japan continue to provide interesting bottom-up investment opportunities. The US growth outlook remains strong, due to robust macroeconomic data, tax cuts and fiscal spending stimulus, while overseas cash repatriation is encouraging buyback activity. Japanese companies continue to witness improved profitability and shareholder-friendly corporate actions. Meanwhile, I have a generally cautious view on emerging markets, with a bullish view on India, which has long-term secular growth prospects.
At a sector level, the focus is on information technology stocks - less on FANGS and more on old tech names like ORACLE and Microsoft, which have solid business fundamentals. I have a more positive view on the direction of oil prices, and continue to invest in long-term ideas in the healthcare space.
Overall, I believe that stock-specific fundamentals will remain the key driver of equity returns. Consequently, the portfolio continues to focus on companies that demonstrate strong pricing power, are led by talented management teams and are available at reasonable valuations.
The current market scenario seems to be where one needs to tread cautiously in terms of portfolio construction, with greater emphasis on finding stocks that lose less, rather than gain more.
