Multi-Asset Investing: Despite risks, growth assets have room to run
An array of cross-currents now confront global markets, but there are positive consequences to the challenges we now face. Take recent trade tensions, for example. Having weakened confidence in pockets of Asia and Europe, they have yet to do so in the US. In a reversal of its deleveraging stance, China now supports tariffs, currency weakness, and monetary and fiscal thrusts. Domestic growth has become a priority to build a buffer against trade, yet re-leveraging China is risky and cannot go on for long given the high degree of existing leverage. While trade-related risks have risen, valuations have reset, and financial conditions remain accommodative.
PineBridge Investments remains constructive about global markets, with a generally bullish stance over the intermediate term. We believe the pace of today’s earnings growth, accompanied by mild inflation, points to mid-cycle dynamics. We expect a re-acceleration of growth, with the next leg up characterised by productivity.
After a slowdown in growth largely due the lack of business investment, companies are stepping up their investment spending. Having seen peers and other businesses being disrupted, today’s business investment is aimed at incorporating disruptive technologies. This investment will drive higher productivity and better profitability, which will extend the cycle beyond what most are expecting. Second quarter earnings continue to confirm broad global momentum, with exceptional US strength, and weaker, yet still healthy, earnings growth outside the US. With all of this in mind, we expect corporate cash flows to grow beyond today’s prices.
Global confidence and productivity indicate an early/mid-cycle phase
What it means for asset allocation
Multi-asset strategies help investors navigate market dislocations by allowing them to dynamically shift allocations across asset classes as market conditions change. In this tug of war between potential downsides and upsides, we believe investors need an intermediate-term view on how the landscape is likely to change, and they need to position their asset allocation to maximise opportunities and reduce risk.
Here are our forecasts:
- Lower prices and robust fundamentals make growth assets more attractive. Overall, while strong earnings growth globally marked the first half of 2018, markets have sold off since February. This has compressed valuation multiples and improved the risk/return tradeoff. We have maintained our constructive expectations over the intermediate term, which implies that forward-looking expected returns have become a bit more attractive.
- Developed market bonds remain unattractive, particularly in the eurozone. We believe that peak US interest rates will be substantially lower than in previous cycles, limiting the downside for US Treasuries even if upside potential also remains unattractive. Meanwhile, German Bund yields have reversed after the European Central Bank pushed rate hikes into late 2019.
- Emerging Market (EM) debt has become relatively more attractive, but only due to a few outliers. EM sovereign hard currency bonds have been negatively affected by US dollar strength and higher US yields. Under the hood, the market has bifurcated, with only a handful of idiosyncratic situations (Argentina and Turkey, for example) skewing the spread level of the benchmark. We are confident that fundamentals supporting EM sovereign credit are robust and vastly better than in past cycles, rendering current valuations rational. Should there be further repricing, this may become an outright attractive allocation within EM.
- Commodity-related assets are attractively valued with supportive supply/demand dynamics. Global miners have exercised capital discipline following the unwinding of the commodity supercycle from 2012 to 2016. Recent global growth consolidation and trade jitters also have pressured this sector’s market value but not its financials. We remain confident that demand is already recovering and able to easily support current valuations.
- Private assets require selectivity and future-proofing. The corporate landscape is becoming increasingly disruptive across almost all sectors, creating a winner-takes-most environment with many losers. It is exceedingly difficult to identify the winners in such a milieu. Our preference is for segments of private markets with shorter J-curves as well as smaller funds, which can afford to be more selective.
Overall, we believe there’s room to run— economic fundamentals continue to indicate that we are closer to the middle of the cycle than the end, and valuations are reasonable relative to anticipated earnings growth.
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Potential investors should consider the following key risks before investing in any of the Strategies mentioned:
Market Volatility Risk: All types of investments and all markets are subject to market volatility based on prevailing economic conditions. Price trends are determined mainly by financial market trends and by the economic development of the issuers, who are themselves affected by the overall situation of the global economy and by the economic and political conditions prevailing in each country. As securities may fluctuate in price, the value of your investment may go up and down.
Investment Loss Risk: Investments may decline in value and investors should be prepared to sustain a total loss of their investment.
FDI Risk: The prices of FDI can be highly volatile. In addition, the use of FDI also involves certain special risks depending on the type of FDI, including but not limited to correlation risk, counterparty credit risk, legal risk, settlement risk, margin risk, as well as other possible risks that may arise.
Equity Risk: The value of shares and securities related to shares may fall due to issuer related issues, financial market dynamics and world events including economic and political changes.
Country Concentration Risk: A concentrated investment strategy in equity and equity-related securities of companies related to the economic development and growth of India may be subject to a greater degree of volatility and risk than a portfolio which is diversified across different geographic regions.
Emerging Market Risk: Emerging markets are typically smaller, less transparent and subject to evolving, less stable political and regulatory regimes.
All investments are subject to regional, industry, market, political, regulatory, competitive, business, financial, and other risks. The risk factors described should not be considered an exhaustive list of risks, which potential investors should consider before investing in the strategy. All investment decisions should be made based on an independent evaluation in consultation with financial and legal advisors.
The source of the information in this document is from Global Multi-Asset team of PineBridge Investments unless otherwise specified.
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