Themes and Opportunities 2019: The Four Elements

WHITE WATERS OF THE LATE CYCLE

We see mounting evidence of overextension of credit. Outstanding debt is increasing, while quality is decreasing. Covenants are deteriorating and speculative use of debt is becoming more evident. Meanwhile, we expect the continuing positive macroeconomic backdrop, pro-business policies and levels of business optimism to continue to assist the equity market in the near term. When these contrasting equity and bond market currents meet, there is scope for white-water turbulence. Navigating such an environment will require investors to be alert, prepared and tenacious. Investors should examine and waterproof their fixed income portfolios. The return of inflation, thought to be long banished, is an additional threat that investors cannot afford to ignore.

WINDS OF CHANGE IN MARKET PARTICIPATION

After the global financial crisis, central banks stepped in for traditional banks as the primary providers of liquidity. As they now try to rein in their market involvement, it is far from clear what the implications for liquidity will be — investors should be on alert for signs of stress. The increased involvement of institutional investors in private markets affects both public and private investors, and a rise in the number of investment strategies that sit somewhere between traditional active management and traditional passive management is likely to benefit many investors not suited to either extreme.

TECTONIC FRICTIONS IN THE GLOBAL WORLD ORDER

Our 2018 theme of political fragmentation continues to be relevant in 2019 (and beyond). It is now considered a credible possibility that the pace of globalization could slow, pause or even go into reverse. Perhaps the most obvious example of the influence of politics on international trade is the state of trade relations between the United States and China. China’s growth and, perhaps more important, its efforts at opening up capital markets raise some practical questions for investors about how to manage their exposure to the world’s second largest economy. Although more turbulence in global politics is likely to continue to weigh on markets, it may present a more favorable investment environment for certain types of opportunistic strategies.

SUSTAINABILITY GATHERING MOMENTUM

Governments, regulators and beneficiaries are increasingly expecting those with responsibility for allocating capital to take a broader perspective of risk and return — although expectations strongly vary among different regions. Can the investment industry continue to invest without serious consideration of the way the world is changing demographically, socially, environmentally, technologically and politically? We recognize that the incorporation of sustainability considerations into portfolios involves the need for a longer timeframe than what is typically used for investment decision-making, but investors who do take a longer-term view may uncover opportunities that are not currently priced in.

We foresee a world where asset owners and investment managers incorporate sustainability as a standard action, moving on from optical responses to a place where sustainability is integral to idea generation and risk management. 

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