A ship’s captain checks for traffic on the bridge in San Pedro, U.S. (Photographer: Tim Rue/Bloomberg)

Global Asset Managers Flag These Two Risks For 2019

The world’s biggest asset managers identify U.S. Federal Reserve’s pace of rate hikes and President Donald Trump’s trade tariffs as the biggest risks for 2019.

Geopolitical risks, including U.S.-China trade war, Iranian sanctions and collapse of peace talks with North Korea, took the markets by surprise in 2018. But asset managers from BlackRock, Oaktree Capital Management and Guggenheim Partners, among others, said the markets have priced them already for 2019.

The predictions come as volatility in the U.S. stock market, usually less prone to sudden swings, spiked. The 50-week moving average of U.S. volatility has crossed the 200-week reading—a pattern called golden cross that signals the index will continue to rise. Since 2001, asset prices have fallen on each of the four occasions when VIX formed the golden cross in the U.S. And that triggered a slide in global equities as well.

Here’s what world’s biggest asset managers expect in 2019:

‘Many Investors Caught Offside’

Scott Minerd, global chief investment officer at Guggenheim Partners, which manages assets worth $240 billion, had bet that the next recession is most likely to occur during late 2019 to mid-2020. Certain events happening now such as fall in crude prices and sudden cracks in the credit market were predicted to happen in late 2019 to mid-2020, he said, adding investors have turned cautious after the recent events.

“I don’t see many investors willing to step in to buy, especially because so many were caught offside. Those investors who got underweight risk early were punished with subpar performance relative to peers, while others chose to linger a while longer at the punch bowl as the party went on,” he said. “Now the punch bowl crowd is caught with too much risk which they are desperately trying to offload.”

Scott Minerd, chairman of investments and global chief investment officer of Guggenheim Partners LLC. (Photographer: Patrick T. Fallon/Bloomberg)
Scott Minerd, chairman of investments and global chief investment officer of Guggenheim Partners LLC. (Photographer: Patrick T. Fallon/Bloomberg)
This looks a lot like a late expansion correction similar to the Asian Crisis in 1998. Then stocks fell by 15 percent. The Fed will be quick to rescue markets if stocks continue to fall from their highs.
Scott Minerd, Global CIO, Guggenheim Partners

‘Move Forward, But With Caution’

Too much money is chasing too few deals, in which investors should emphasise caution over aggressiveness, said Howard Marks, co-chairman at Oaktree Capital Management, which manages assets worth $100 billion.

The U.S. economy is growing but relatively free of excesses, he said, adding the possible effects of economic overstimulation, increasing inflation, contractionary monetary policy, rising interest rates, rising corporate debt service burdens, soaring government deficits and escalating trade disputes create uncertainty.

“There’s a global glut of liquidity, minimal interest in traditional investments, little apparent concern about risk, and skimpy prospective returns everywhere,” he said. “Thus, as the price for accessing returns that are potentially adequate (but lower than those promised in the past), investors are readily accepting significant risk in the form of heightened leverage, untested derivatives and weak deal structures.”

Howard Marks, co-founder and co-chairman of Oaktree Capital Group LLC. (Photographer: Christopher Goodney/Bloomberg)
Howard Marks, co-founder and co-chairman of Oaktree Capital Group LLC. (Photographer: Christopher Goodney/Bloomberg)
It’s not that investors shouldn’t invest today or shouldn’t invest in debt but should move forward with caution.
Howard Marks, Co-Chairman, Oaktree Capital Management.

‘Weak Global Cues Likely To Have An Impact’

The U.S. economic parameters are strong but the weakness in global parameters is likely to have an impact on growth in the world’s largest economy, said Jeffrey Gundlach, chief executive officer at DoubleLine, having assets under management worth more than $100 billion.

Though it is not a bear market, the set up for the equity markets looks like going into a bear market in the middle of the year, he said, adding the global growth is slowing with Europe being worst hit.

Jeffrey Gundlach, founder and chief executive officer of Doubleline Capital LP. (Photographer: Jonathan Alcorn/Bloomberg)
Jeffrey Gundlach, founder and chief executive officer of Doubleline Capital LP. (Photographer: Jonathan Alcorn/Bloomberg)
There was a synchronised slowdown when trade war started in 2018 with PMIs of export orders collapsing globally, especially in Germany. The G3—U.S., U.K. and the European Union—is showing rising trends of accelerating wage pressure, these may abate if the global economy continues to cool. The wage growth in the U.S. at 3.1 percent is higher than real GDP. We are going to see a potential risk of slowdown in GDP or it getting adjusted lower.
Jeffrey Gundlach, Chief Executive Officer, DoubleLine.

The action of the Korean stock market, according to Gundlach, is an indicator of global slowdown. The Kospi is an export sensitive index with large percentage of companies being export-oriented. The global conference board leading indicator for global markets is showing signs of a weakness and if this persists it may impact the U.S., he said.

“The U.S. Fed wants to raise rates and reduce their balance sheet and do not want any consequences, but it’s very unrealistic,” Gundlach said, adding the Fed’s change in stance from being “long way away from Neutral” in October to “very close to Neutral” in November affected the stock market.

“The Fed is scared sick to look at the stock market and scared sick to look at the fact that the five-year treasury is now a few basis points below the two-year treasury.”

‘Stay Away From European Equities, Sovereign Bonds’

Navigating markets in 2018 has been tough with returns in bond, equity and credit markets globally on the verge of finishing the year in negative territory, according to Richard Turnill, global chief investment strategist at BlackRock—that manages nearly $6 trillion. “The uncertainty around trade, together with higher interest rates, has been a major drag on stocks, offsetting solid earnings growth.”

BlackRock said the markets are vulnerable to fears that a downturn is near even as the actual risk of a U.S. recession is low in 2019. Global earnings growth is also set to moderate in 2019, tracking the more subdued growth outlook.

Richard Turnill, Global Chief Investment Strategist, Blackrock (Photograph: Bloomberg TV)
Richard Turnill, Global Chief Investment Strategist, Blackrock (Photograph: Bloomberg TV)

Here are the three lessons learnt from the year gone by, according to Turnill:

Geopolitics Matter

Geopolitical uncertainties such as the risk of fragmentation in Europe is a cause of worry, Turnill said. “Overall, we find the impact of geopolitical shocks on global markets to be more acute and long-lasting when the economy is weakening.”

Rising Yields

Rising short-term yields have made cash a viable alternative to riskier assets for U.S.-dollar-funded investors and have exposed markets with weak fundamentals, Turnill said.

The Fed is expected to pause its quarterly pace of hikes amid slowing growth and inflation in 2019 even as tighter financial conditions which pushed up yields is set to ease in 2019, he said. “We may see many emerging market assets offering better compensation for risk as we head into 2019. But emerging market countries with large external liabilities are vulnerable to any greater-than-expected Fed tightening.”

Portfolio Resilience

Turnill advised to build portfolio resilience after broader market drawdowns have become more frequent in 2018 as volatility rose from the doldrums of 2017.

“We would be wary of assets seeing sharp price rises that are disconnected from fundamentals. We prefer a barbell approach: exposures to government debt as a portfolio buffer on one side and allocations to assets offering attractive risk/return prospects such as quality and emerging market stocks on the other,” he said.

Janus Henderson’s Investors

One of the significant factors going into the new year is trade tariffs, said Jeremiah Buckley, U.S. equities portfolio manager at Janus Henderson—that handles more than $378 billion in assets under management.

“If trade disputes or tariffs impinge too much on corporate earnings and companies have to lay off employees, that could hurt consumer confidence and spending,” Buckley said. “It’s something we’re cognisant of and watching.”

Justin Tugman, U.S. portfolio manager at Perkins Investment Management, part of Janus group, however, said resolutions for many of these issues could come in 2019.

Here’s what Tugman had to say:

  • Monetary policy, not just in the U.S. but around the world, could become an increasing focus.
  • Economic growth could slow.
  • With increasing leverage on company balance sheets, credit concerns could become more worrisome.
  • The performance of value stocks compared with growth stocks will continue to improve.