Dutch asset manager Robeco said 2019 is expected to be a turbulent year for the financial sector.
The firm said in its 2019 outlook that the financial market next year will have “two faces”, there will be sustained, above-trend growth in developed economies and stronger growth in emerging countries.
However, the positives are expected to be overshadowed by concerns that the long bull market will soon end amid rising interest rates, trade wars, potential “overheating” of the US economy and concerns surrounding Italy and Brexit.
Léon Cornelissen, chief economist at Robeco, said: “We can expect some turbulence in 2019. There ’s Brexit, Italy, trade tensions between the US and China, the likelihood of the US economy overheating, and central banks which will, at some point, slam on the brakes to slow down growth.
“Investors would be well-advised to prepare for these concerns becoming reality.”
Geopolitical impacts
The asset manager insisted trade tensions between the US and China are likely to continue, though without any significant escalation.
It expects growth in the EU will probably mirror that of 2018 and remain above trend. A key negative risk factor for Robeco is after 29 March 2019 when the UK leaves the EU. A transition deal is to be expected with the hope for the financial world that little actually changes.
The budget plan of Italy’s new populist government is a second risk factor, as it violates prior budget agreements with the EU. Nevertheless, Robeco believes that Italy will eventually back down as doing so is in the country’s best interests.
Emerging and developed markets
The growth differential between emerging and developed markets is expected slowly start to widen, opening the door for investors with a bigger risk appetite to generate higher returns.
The firm said: “In China, policy will be aimed at maintaining a relatively high growth rate, i.e. above 6%, although they will probably have no other choice than to accept a lower figure than in 2018.
Thanks to sustained growth in China and in developed markets, 2019 looks fairly good for emerging markets.”
Equities
Robeco said that equities are preferred over bonds. However, it said that investors should start looking at “more defensive equities, including high quality, value and low risk equities”.
The company said that US equities tend to qualify as being “defensive”, “their attractiveness has diminished as investors have priced in an extremely risk-friendly environment in the US compared to other regions”.
Instead, with risks related to Brexit and Italy getting closer, European equities look more attractive.
Jeroen Blokland, portfolio manager of multi-asset funds at Robeco, said: “Equity prices will probably move higher before things really start to heat up, in which case it makes sense to start to focus on equities with a more defensive profile.
“In addition to low-risk equities, we think equities with a low valuation, high quality and/or high dividend fall into this category. After nearly a decade of above-average returns, US equities are overvalued, not least compared to equities in other regions. We expect the tables to turn, generating new opportunities in 2019.”
Bond market
The firm added that credit and high-yield bonds “tend to struggle” during the later stages of the economic cycle.
Average credit ratings have come down, and this, combined with very low spreads and yield levels, makes it “unlikely that this time will be different”.
Robeco does not expect a lot from euro government bonds, either. It said, “though yields have risen slightly, they are still remarkably low and are likely to go up as central banks end their quantitative easing programs”.
US treasuries are predicted to become an interesting asset class as yields rise further. Also, local currency emerging market bonds have reportedly become more attractive due to the huge depreciation of emerging currencies, while the yields are much higher than in developed markets.
