The challenges of investing later cycle
Global markets continue to successfully navigate a maturing economic cycle, underpinned by strong fundamentals of synchronised growth, still benign inflation and solid earnings momentum. This is despite a steady stream of geo-political flashpoints—from rising threats of an escalating US-China trade war to rising political uncertainty across Europe.
At our recent Crestone Investment Forum, we were joined by Graham Hay, Deputy Portfolio Manager at Antipodes Partners, Brett Gillespie, Head of Global Macro at Ellerston Capital , Scott Haslem, Chief Investment Officer at Crestone, Prashant Chandran, Head of Derivatives at Western Asset Management, Anne Anderson, Head of Fixed Income and Investment Solutions at UBS Asset Management, Anthony Aboud, Portfolio Manager at Perpetual Limited and Ed Blight, Manager of Advisory NSW at Crestone. We asked panellists to discuss some of the challenges facing investors as they navigate the later cycle. Overall, tighter credit conditions, rising bond yields and emerging cost pressures are a focus. Finding genuinely uncorrelated alternative assets to diversify portfolios is also seen as key to reducing portfolio risk.
Four key themes emerged from the forum
- Emerging market equities will continue to face some near-term pressure
Structural investment themes are attractive in emerging markets, particularly in China and the rest of Asia. However, the panel felt that the tightening of global credit conditions, which still has some way to run, as well as the uncertainty of rising protectionism and a potentially stronger US dollar, were headwinds to a tactically more positive view. Given the recent sharp correction, a de-escalation in trade disputes may warrant a more positive view.
- Global bond yields are still expected to move higher into 2019
A decade on from the Financial Crisis, the global economy is only now approaching full capacity—while central banks outside the US Federal Reserve (Fed) have yet to start meaningfully tightening policy. A sharper-than-expected rise in interest rates was seen as a risk to the outlook, potentially driven by an unexpected jump in wage pressures. However, an ongoing steady move higher in yields in 2019 was expected to be the more likely outcome.
- The domestic equity reporting season suggests prior aggressive cost-out gains had been exhausted
The reporting season delivered typically in-line results in 2018, but guidance was weaker than expected. A number of sectors were seen to have underinvested—or were facing rising labour cost pressures. Offshore markets, particularly Asia, were viewed as less expensive and presenting some better longer-term structural opportunities than Australia.
- Finding alternative investments that are genuinely not exposed to the market remains key in the later cycle
Managers of alternative assets are facing challenges given the wide range of potential scenarios that could unfold over the coming year. They also face challenges as bouts of volatility do not persist and style trends (such as growth versus value) continue for much longer than expected.
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Read the full in depth Around the Table panel discussion here
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