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Wealth Managers Take Some Chips Off The Table

Tom Burroughes, Group Editor , 19 December 2018


A general mood of caution emerges from this selection of views from wealth managers.

As 2018 winds down ahead of the holiday break, here are some views from wealth managers about how they are positioned for next year, and their thoughts on the risk factors in play. We have recently seen organisations such as UBS, the world's largest wealth manager, set out its views for the coming year, with a general tone of cautious optimism. 

Louisa Lo, head of Greater China Equities, Schroders

We are taking a defensive stance, staying underweight to the technology sector, while emphasising domestically-focused areas of the market and those with long-term growth trends. Following a cyclical recovery in 2017, driven by robust domestic demand and supply-side reforms, the emphasis in China has since shifted to the quality of economic growth.

With political power consolidated under President Xi, this focus on quality growth as well as economic and social stability brought renewed efforts to shrink the shadow banking sector. The government’s effort to deleverage the economy and increase regulatory oversight led to concerns around economic growth coming into 2018. Indeed, we saw credit conditions tighten on the back of reduced shadow banking activity. Tighter credit led to a rise in credit defaults this year, while areas including industrial production and fixed asset investment also lost momentum.

Earnings-per-share growth is currently forecast to be in the mid-teens, but we think that is likely to moderate going into 2019. 

We remain relatively defensively positioned going into next year given the current environment, with most of our exposure concentrated in domestically-focused names and sectors showing long-term growth trends. We remain underweight to technology stocks given uncertainties brought about by regulatory headwinds. We prefer the energy sector given discipline on the supply side and on pricing.  We also favour Chinese insurance companies, and names benefiting from domestic consumption, where we are seeing a pick-up in offline consumer activity.

Valuations for China equities have become more attractive and suggest upside for investors over the medium term. However, investors are likely to remain cautious in the near term given the likelihood of further cuts in earnings' forecasts, continued uncertainty on the trade front, and continued increases in US interest rates in the next few months.

Michael Grady, head of investment strategy and chief economist at Aviva Investors
In a slowing growth environment, investors tend to focus more on downside risks. Although the economic backdrop continues to provide a basis for positive returns for risk assets, expectations of more moderate growth and tighter global liquidity, and the impact of those risks, justify more restrained positioning.

We prefer to be overweight in US and emerging market equities because of the expected relative growth outperformance. Valuations in Europe look more attractive in some areas, but downside risks such as Brexit and the Italian budget continue to weigh on the outlook.

We are moderately underweight in government bonds as yields will continue to move higher on expectations that central banks will tighten policy in 2019. With spreads relatively tight by historical standards, we have a bigger underweight with regard to credit, including duration. Our preference is for European over US high yield due to its lower leverage and reduced sensitivity to oil prices. We have a slight preference for being long US dollars, with the main underweight against Australia on domestic challenges and Chinese growth risks.

Manish Singh, Crossbridge Capital

The year 2018 will go down as one of the best in the nine recent years of US economic expansion. The unemployment rate, at +3.7 per cent, remains at a 49-year low. US GDP rose by +3 per cent in Q3 from a year earlier, a rate of growth exceeded in only three other quarters in this expansion that began in March 2009. Inflation reached the US  Federal Reserve’s (Fed) target of +2 per cent without overshooting it and wage growth is inching up to +3 per cent (still well below the +4 per cent of past expansions).

Meanwhile, in the rest of the world, the year began with most major economies expanding - leading some to think that Europe was going to expand at an even faster rate than the year before. By the third quarter, output in Germany - the eurozone’s largest economy - had contracted and the eurozone is expected to grow at sub +1 per cent rate this year. Japan has also seen a slowdown and as China’s economy and global trade volumes slowed, many Central Banks globally took a step back from sounding hawkish on interest rates.

I expect equities will rise post the Fed meeting this week as the dovish views finally get priced in. The US economy is set to grow at over +2 per cent rate in 2019. This leaves a window for equities and other risk assets to show renewed strength given the recent sell-off. The US economy does not need a tax cut. In fact, a tax cut will be counterproductive and it may overheat the economy, get the Fed to step in and raise rates and cause a recession in 2019.

I still recommend an overweight position in equities with a bias to US equities and sectoral bias to – industrials, technology, financials and healthcare. Despite the news of a yield curve inversion at the front end (2-year and 5-year), I put the probability of a recession in the US next year at very low. The US economy is set to grow at over +2 per cent rate in 2019. 

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