Summary: A trilogy of challenges
First, we expect a material slowdown in growth in most of the major economies in 2019, with downside risks rising as we move into 2020. The main driver of weaker conditions is the gradual tightening of financial conditions, as the major central banks raise interest rates and/or withdraw money from the financial system. We believe that a recession in one or more of the major economic regions is likely over the next three years – a more cautious view than in 2018.
Second, relative to our medium-term outlook, we think valuations for growth-related assets are still high and expect low returns on average over five years, putting pressure on savers’ wider financial positions.
Third, achieving fixed ‘inflation plus’ targets – and hence meeting savers’ expectations – is going to be difficult in this environment in our view, even over longer time periods.
Five portfolio priorities for a surprise-free 2019/2020
Diversify: Relative to equity-heavy peer groups, diversification is not always painless, but we remain firmly of the view it will prove correct.
Reduce unrewarded risks: An implication of our longerterm outlook is that the same forces pushing long-run expected returns lower are also pushing the returns required to meet savers’ objectives lower; assess if required return targets are appropriate; integrate scenario analysis to manage financial and extra-financial factors.
Macro and dynamism: Dynamically managing risk is accessible; dynamism to create long-term value is hard.
Innovate through alpha: In these conditions, the value of skilled active management is outsized; our track record shows it can be found.
Innovate to find diversity: China — a new and diversifying set of assets for investors.
- 2018 Emerging Markets Outlook: Rally In EM Equities to Continue – Particularly for Emerging Asia (Fiera Capital)
- Emerging Markets in the East Converging With Developed Markets in the West (Create Research)
- Outlook 2018: Emerging Market Equities (Schroders)
- Frontier Markets: One of the Last low-Correlated Asset Classes? (Commerzbank)
- Emerging Markets: How to Unlock the Next Wave of Returns (Amundi Asset Management)
- Mastering Emerging Market Debt (Willis Towers Watson)
- Emerging Market Fixed Income: Characteristics of the Asset Class (FTSE Russell)
- Nikko AM’s Sartori: Best Buying Opportunities in Asia in My Career (AFR)
- Asia Infrastructure Investment Returns Are Shrinking (FinanceAsia)
- How ETFs Amplify the Global Financial Cycle in Emerging Markets (Federal Reserve)
- The Tailwinds Have Arrived: Our 2018 Outlook for Emerging Markets (Hermes Investment Management)
- Powell Pushing Asia Into a New Financial Crisis (Asia Times)
- As Emerging Market Growth Slows, Moody’s Thinks Advance Economies Will Drive Global Growth
- Emerging Market Economies: A Brighter Outlook for 2019? (Hermes)
- Is This Divergence an Emerging Market Warning Sign? (BCA Research)