Macro themes for 2019
1. From QE to QT
Investment implication: As we move from the quantitative easing (QE) to quantitative tightening (QT) regime, micro factors – country, sector and issuer-specific – become more important. In addition to a greater emphasis on ‘bottom-up’ security selection, greater volatility and tactical asset allocation can also be a source of alpha. The new environment is fertile for active strategies that focus on rigorous bottom-up security selection and globally diversified investment strategies.
2. The multi-decade trend of falling inflation and interest rates is over
Investment implication: Investors must look beyond QE-diminished beta for fresh sources of returns and diversification for their portfolios. Unsurprisingly, investors are shifting to alternative approaches to fixed income that are not solely reliant on interest rate duration to drive returns and diversify equity risk.
3. Another year of solid global growth; fears of ‘late cycle’ and recession risk are premature
Investment implication: Going into 2019, European credit offers an attractive risk/reward profile, but greater dispersion and merger and acquisition activity means US credit offers greater alpha generation opportunities. A structural investment opportunity that remains in place despite disappointing growth and Italian political risk is European bank healing and disintermediation, which can be accessed in several ways to best reflect investors’ risk appetite and liquidity profile.
4. Political uncertainty will create opportunities for ESG-savvy investors
Investment implication: Responsible investors are responding to the challenges posed by greater political uncertainty and climate change by incorporating environmental, social and governance (ESG) factors into their investment process. Ignoring ESG not only places investors’ capital at greater risk but also precludes return opportunities that arise from the mispricing of ESG-related factors.
5. Value in emerging markets
Investment implication: Strategies that are nimble and able to position on the short side as well as the long side and are less constrained by benchmarks in their investment process are best placed to exploit the opportunities offered by emerging markets. Bottom-up selection becomes more important, favouring active investment based on the fundamental analysis of idiosyncratic risks.