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.
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