The difference
between 2017 and 2018 was due to a regime shift that goes beyond the cyclical
nature of asset markets. Indeed, for the first time in more than 30 years, it
seems as if bond yields have started to rise for good. This change in regime
confronts an investor community that has never had to deal with structurally
rising rates in their careers. The last time bond markets went from deflation
to reflation was, in fact, back in the 1950s.
The last official
US recession was in 2009 and investors are wondering how much life is left in
the current cycle. Looking at the growth/inflation dynamics, we think 2019 will
prove to be a solid year for growth, with some upside risks to inflation rates.
Growth topping and
inflation rising – is this stagflation in the making? The answer is no,
stagflation - the combination of high unemployment and high inflation - is quite a different
animal. With more than 3.5 per cent growth and ‘only’ 3.5 per cent inflation
expected in 2019, the global economy could not be further away from the
stagflation misery that haunted it back in the 1970s. Yet it is a typical
late-cycle environment. Looking at the longer-term picture, we deem the current
environment to be rather like the 1950s, when rates rose only moderately.
However, given the
fact the global economy has normalised, monetary policy will most likely
normalise too. This is true of the US Federal Reserve, which started the
process two years ago. It should bring target rates (again) to 3.5 per cent or
so. In 2019, other major central banks may follow suit.
The European
Central Bank is expected to terminate its asset purchase programme by the end
of the year. Given the economic backdrop and still subdued inflationary
pressures, an interest-rate hike is rather unlikely in the first half of 2019.
Interest-rate normalisation would, however, be positive for European equities.
The Bank of Japan has started to adapt its rhetoric and will likely continue to
do so in the quarters ahead.
For investors, this
means that monetary policy support, which has been one of the major tailwinds
in the investment world, is fading. Investors ought to bear this crucial factor
in mind going forward.
With regard to the
political noise ahead, the ‘ceasefire’ in the US–China trade conflict is
short-term positive for global equity markets. However, it remains to be seen
whether the two countries are able to solve the thorny issues to be discussed
in the next three months. In view of the ongoing geopolitical rivalry, the risk
remains that the ‘ceasefire’ will prove to be only temporary. The trade
conflict and other political market movers such as Italian Politics and Brexit
will remain wild cards.
Looking at global
government bonds, we believe they will remain vulnerable. We continue to prefer
selected exposure in the credit segment. Emerging markets hard-currency
corporate bonds are particularly attractive given the moderate leverage of the
underlying corporates and the relatively attractive credit spreads.
The continued rise
in the cost of capital will maintain pressure on highly leveraged assets and
market segments.
What matters for
your portfolio in 2019? We believe these four topics are set to remain relevant
throughout 2019:
1. Adapt your
portfolio as interest rates rise
Developed market
equities continue to drive portfolio performance:
• Growth in the
developed world remains robust and the economic cycle is not yet coming to an
end.
• Yields are set to
rise further as inflation kicks in.
2. Capture Next
Generation trends in your portfolio
Digital disruption
– from IT to mainstream:
• Digital
innovation is reshaping all industries.
• The recent
correction provides interesting entry points into some of the most exciting
themes.
3. Find a store of
value
Swiss equities are
hard to beat:
• With political
and market risks on the rise, diversification is increasingly important.
• Swiss equities
have proved to be a store of value time and again.
4. Navigate
financial markets
2019 is set to be a
year for active investing:
• Increased
volatility is here to stay.
• Investors not
able or willing to follow the market closely should rely on actively managed
solutions.
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