What To Expect In 2019?

Date: 22 January 2019

 

“Uncertainty” is the keyword to sum up 2018, and the challenges for investors do not stop with stocks. Bonds, gold and oil are among the assets down and even the once-mighty tech stocks (FAANG) slumped into the bear markets. Beyond the key issues of 2018, what are the opportunities for 2019? How can investors reposition and gain from the upcoming trends? Our expert panellists share their views on the forecast for 2019.

Federal Reserve, Trump and Xi have had a huge impact on the market in 2018. Will this trend continue in 2019?

Margaret: Due to the complexity and significance of US-China relationship in trades, geopolitics and economics, the top leaders of both countries are likely to exert great influence over global market over the course of 2019. The key issues cover trade tariffs, regional security, currencies, disputes over Intellectual Properties, and divergence in business conducts.

In fact, the US-China trade spat has already posed a threat to the global economic outlook through to 2019, and risk assets have already reacted negatively against the outcome of a trade war. Various rating agencies, brokerages and banks have forecasted that in an event of a full-blown trade war, China’s GDP could be dragged down by 0.4% to 1.5%. For US conglomerates, trade tariffs have led to rising input costs and complicated the outlook of their supply chain from China.

Peggy: Interest rate trends and trade policies will still featured prominently in 2019 and but we believe 1Q19 will be dominated by the outcome of Brexit in the UK as the deadline of 29 March 2019 draws near. The UK government has agreed on the withdrawal agreement with the European Union (EU), but still needs support internally, without which, the UK might end up with no deal and this notches up political uncertainty. The EU has also ended its Quantitative Easing program at end-2018. Together with a tighter labour market, this might lead to an early deposit rate hike while GDP growth in the EU region is expected to slow.

Selvan: The Fed’s rate hikes and Trump-Xi trade tensions plagued global equity and bond markets in 2018. This, coupled with China’s deleveraging and a stronger USD (weaker emerging-market currencies), sank investors’ appetite for emerging-market and Asian assets. However, we think that these headwinds will slowly dissipate in 2019. Recently, the Fed has been suggesting that the policy rates could be closer to neutral rates. We read this as another two to three rate hikes, including one in December 2018. This means that the Fed’s rate hike cycle could be ending or coming to a pause soon, and this would likely alleviate the upward pressure on the USD and give Asia and emerging-market economies some room to breathe. Economic growth in the US is likely to slow down in 2019, as tax cuts and fiscal stimulus wane off. The narrowing of growth differential between the US and the rest of the world is also likely to turn investors’ attention back to growth markets in Asia and emerging economies. We do not think that the deeper underlying divide between the US and China can be reconciled anytime soon. While we may have some compromise on the surface with a freeze in tariffs and markets may rejoice at this, we are likely to see other areas of dispute arising every now and then. Companies and economies will have to start thinking about automation, on shoring and restructuring of their supply chain networks to prepare for this new world of protectionism and closer-to-home manufacturing.

Portfolio resilience is key, amidst market uncertainty. How can investors reposition their portfolios in this current condition?

Margaret: Amid rising uncertainties in trades and the backdrop of global monetary normalisation, we are seeing gradual rate hikes in Singapore, Hong Kong and US. This will have a long-lasting impact on asset valuation and will potentially catalyse a rebalancing between equity, bond, commodities, cash and cash equivalent assets in portfolio management. Rising interest rates will make non-yield commodities like gold less attractive than before, as the opportunity cost of holding precious metals is now rising. Rising interest rates are generally harmful to equities, making companies’ borrowing cost higher, although for financial companies, wider interest margins could be positive news.

Peggy: Market uncertainty usually presents an opportunity to accumulate valued assets. The key is to gain an in-depth understanding of the fundamentals and the intrinsic value of these assets and compare this with the market value to arrive at an investment decision. Not every company or asset is impacted to the same degree with every turn of events. A lot depends on the strength of a company’s management, the resilience of its products or services, and the processes the company have put in place to withstand external shocks. Due diligence and detailed research have become even more important than before.

Selvan: American economist and Nobel Prize winner, Harry Markowitz called diversification “the only free lunch in finance”1. A portfolio constructed with diversified asset classes and geographical allocation would withstand market volatility better and keep you on course for your investment plan.

In the medium term, we think equities have de-rated and are looking attractive again. 2018 was the year in which we saw valuations of asset classes reflecting higher risk-free rates and a higher risk premium. US equities were trading at about 18 times forward price-to-earnings ratio (P/E) as at the end of last year; but now, it is trading at about 16 times forward P/E. This de-rating in valuation has happened despite strong earnings growth, a resilient US economy and a stronger USD.

In Asia, we observed a similar phenomenon. Valuations of Asian equities de-rated from 13 times forward P/E at the end of last year to about 11 times forward P/E now. This reflects higher risk-free rates and a higher risk premium.

Similarly, in the fixed income space, we saw bond prices reflect rising Treasury yield and wider credit spreads reflect tighter liquidity conditions and softer growth.

As we enter 2019, we think asset valuations have been reset to more reasonable levels. For equities, we expect about 6% to 10% earnings growth for the US and Asia, including Singapore. As we do not expect any significant P/E change, we believe equities are likely to return mid- to high-single digit returns in 2019. Bond prices have also been reset and we think we should be able to clip coupons and enjoy returns of 3.0% to 3.5% from Asian bonds.

For 2019, our preferred asset classes are emerging-market and Asian equities, Asian high-yield bonds, and other growth sectors like global technology and healthcare.

With more robo-advisory platforms available in Singapore, is there a shift in the behaviour of local investors? How can one embrace such technology?

Margaret: Robo-advisory is an emerging technology that is still very much in its developing stage. Therefore, investors should still exercise careful and diligent discretion when taking advisories from there, although it could be taken as a secondary source of reference.

Peggy: Robo-advisory platforms are good entry-level tools for new investors and young investors who can start their investment experience earlier in life in order to enjoy the compounding effect of returns. However, every platform is different. A potential investor needs to ask questions such as the criteria for investment decisions, the frequency of review of the portfolio, the effectiveness and experience of the manager that sets the criteria, the geographical and sector coverage, etc. With so many platforms available, there is a need for differentiation. Just going on low or zero fees is not good enough. The portfolio needs to be well-managed and match the risk profile of investors, and have adequate protection against risks.

Selvan: We observed a wave of robo-advisory platforms being launched in Singapore over the last 18 to 24 months. Players like StashAway, AutoWealth or Smartly have made good inroads into this sector and gathered some decent assets2. These are rule-based or economic-cycle-based algorithms that pick unit trusts or ETFs from different markets, asset classes and sectors depending on market and economic conditions. They are basically a multi-asset portfolio designed to weather market volatility and deliver stable returns. The traditional model of risk profiling investors into low-risk, moderate, high-risk buckets, is fast losing its relevance.

Our conversations with industry players suggest that the take-up is still slow and more investor education and awareness need to be carried out. One thing is clear though: young and savvy investors are jumping on the robo-advisory bandwagon, attracted by its low-cost proposition. Platform fees are anywhere from 0.2% to 1.0%. It also promises to keep you invested for the longer term, taking care of the asset allocation and tactical switches. If the future belongs to the self-empowered millennial, then robo-advisory platforms are the way to go. Question is whether we are ahead of time.

The biggest hurdle is that investments are sold and not bought. Investors will still need human advisors to hold their hands and guide them into the world of investments and finance. When markets are volatile, they will need a reassuring voice to tell them to stay the course and look long term. This is the key role human advisors are likely to play. Robo-advisory could eventually turn into an investment tool used by financial advisors, and it does not look like human advisors would be replaced anytime soon.

In this volatile market, which sector will strengthen, and which will likely weaken further?

Margaret: Technology shares, especially those in the US, have suffered from heavy sell-offs in October 2018. A cautious outlook of the tech sector’s growth prospects into 2019, rich valuation, trade risks and rising borrowing cost were among the biggest concerns. If none of the above-mentioned factors get resolved in the months to come, the technology sector is likely to continue to underperform the broader market with defensive sectors getting more favoured.

Peggy: Consumer and healthcare sectors are usually considered the defensive sectors, as demand tends to be more inelastic even during volatile times. However, these are also the sectors that face the greatest pressure when interest rates rise, as investors would demand a higher return to cover the higher risk-free rates. Nevertheless, given the rising aged population, healthcare spending will see steady increase. The technology sector might see reduced demand in 2019 with less exciting new upgrades. The next wave of upgrades will come from Internet Of Things (IOT) products, electric and autonomous vehicles and 5G-enabled devices, which we expect to see in late 2019 or early 2020. Until then, the tech sector might stay benign.

Selvan: We do not see a US recession in the next 18 to 20 months. The biggest risk is a policy error by the Fed, but it looks like the Fed is turning dovish. It does not want to be blamed for prematurely ending this economic recovery or causing an emerging-market crisis. In this scenario, we think investors would look for growth assets. We continue to like secular growth ideas like emerging-markets bonds, Asian equities, global technology (and disruptive) sectors or global healthcare.

We do not see global inflation rising too much as we enter 2019. As such, commodities are unlikely to outperform. We have long-term concerns about oil, as automobiles increasingly go electric and become autonomous. We are also concerned about the European banking sector, as the balance sheets have not been fully repaired or restored. The euro experiment comes under stress every now and then. As such, we would shy away from Europe at this point in time.

Give investors one piece of advice as they head into 2019.

Margaret: As we are probably coming to the end of a mega credit cycle, prudent risk management and positioning against rising risk-free rate is becoming crucial. Investors should refrain from over-leveraging themselves against rising borrowing costs. They will probably find their cash in hand more and more valuable in the years to come.

Peggy: We believe that investors need to stay diligent and focused heading into 2019. Avoid reading the headline news only. Reaching for more in-depth information and analysis is becoming ever more important. There tends to be a lot of bad news and false optimism being flashed out daily that have an impact on investor sentiments. We need to be discerning in our investment decisions, and not swing with the flows. The current market conditions reward the hardworking investors that take a longer-term investment horizon.

Selvan: Economic cycles and business cycles do not die of old age. Most of the time, the central bankers kill them. If we believe that the Fed would take caution to preserve the ongoing economic momentum, this run in global asset prices could continue longer than we think. The Fed is your friend. Therefore, we would advise investors to stay diversified and stay invested for the longer term.


  1. https://www.bizjournals.com/milwaukee/news/2018/10/03/invest¬ment-diversification-the-only-free-lunch-in.html
  2. References to specific corporations/companies are not intended as recommendations to purchase or sell investments in such corporations/companies nor do they directly or indirectly express or imply any sponsorship, affiliation, certification, association, approval, connection or endorsement between any of these corporations/companies and Lion Global Investors Limited or the products and services of Lion Global Investors Limited.
 

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