Rotterdam, 8 November 2018 – Robeco expects turbulence in 2019, according to its annual outlook which was published today. In 2019, the market will have two faces, on the one hand, there will be sustained, above-trend growth in developed economies and somewhat stronger growth in emerging countries. However, on the other hand, the bright economic picture is expected to be overshadowed by concerns that this long bull market will soon end amid rising interest rates, trade wars, potential overheating of the US economy and concerns surrounding Italy and Brexit.
Trade tensions between the US and China are likely to persist, though without any significant escalation. Growth in the EU will probably mirror that of 2018, and, as such, remain above trend. A key negative risk factor will be a thing of the past after 29 March 2019 when the UK leaves the EU. A transition deal can be expected, that will ensure 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.
The growth differential between emerging and developed markets will slowly start to widen, opening the door for investors with a bigger risk appetite to generate higher returns. In China, policy will be aimed at maintaining a relatively high growth rate, i.e. above 6.0%, 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 are preferred over bonds. However, it makes sense to prepare for turbulent times. Investors should start looking at more defensive equities, including high quality, value and low risk equities. While 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 abating, European equities look more attractive.
Within bond markets, it will be hard to find decent returns. Credits and high yield bonds tend to struggle during the later stages of the economic cycle. Average credit ratings have come down over the years, and this, combined with very low spreads and yield levels, makes it unlikely that this time will be different. Robeco doesn’t expect a lot from euro government bonds, either. Though yields have risen slightly, they are still remarkably low and are likely to go up as central banks end their QE programs. On the brighter side, US Treasuries are likely to become an interesting asset class as yields rise further. Also, local currency emerging market bonds have become more attractive due to the huge depreciation of emerging currencies, while the yields are much higher than in developed markets.
Léon Cornelissen, Chief Economist: “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.”
Jeroen Blokland, Portfolio Manager Multi Asset funds: “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.”
The full report is available on request, or can be downloaded here: www.robeco.com/outlook.