Four key investment themes for 2019

December 31, 2018 14:15
Following President Donald Trump’s success at turbocharging an already hot US economy, more governments are looking to pump fiscal stimulus into their economies. Photo: Reuters

The global economy, which has been doing fairly well, is likely to become even less synchronized and more fragmented. This would continue a trend that began in earnest in 2018 as market returns turned negative.

Trade tensions and political uncertainty are set to be primary drags on performance, while high oil prices and tight labor markets in the United States, the United Kingdom, Germany and Japan could heighten fears of rising rates and inflation. Investors therefore should aim to be more active and selective.

Below are the four attractive long-term themes that investors should pay attention to in the coming year:

1. A new “tech cold war” could disrupt global supply chains.

During 2018, the Trump administration identified China as a strategic technological threat. This has led to fears in China that American technology may ultimately become unavailable, which would be a strategic threat to China’s own economic security. This may prompt both the US and China to build their own discrete tech ecosystems. The result could be a “tech cold war” that lowers profit margins, inhibits innovation and disrupts the global supply chains of tech companies in Asia and the US.

2. Quantitative tightening could mean less growth and higher volatility.

Central banks have finally started easing back on the stimulus they pumped into the global economy in the wake of the financial crisis. In the US, the Fed is raising interest rates and beginning “quantitative tightening” (QT) by reducing its bond holdings. As this approach is replicated around the world, we expect to see higher volatility.

Following President Donald Trump’s success at turbocharging an already hot US economy, more governments are looking to pump fiscal stimulus into their economies. That means more sovereign bonds could be issued in markets where central banks are already trying to unload their holdings. This will likely raise rates for borrowers and hurt the more indebted parts of the global economy, particularly emerging markets. If this happens, expect slower growth and a higher prospect of defaults.

3. ESG is becoming mainstream, as investors recognize the potential for managing risk and driving performance.

Environmental, social and governance (ESG) factors have become a primary concern for investors. Companies that manage their ESG profiles well – focusing on areas such as strong governance, climate change and board diversity – are likely to strengthen their positions in the coming years. Investors who examine these ESG factors can gain an additional layer of insight for identifying opportunities in a marketplace that increasingly demands selectivity.

Yet the rising interest in ESG has coincided with an increase in categorization to address different philosophical positions and investor requirements, so it is important to be clear about what the different labels mean.

“Integrated ESG” – which embeds the consideration of ESG factors into an existing investment process – is gaining traction.

We take a rigorous approach to ESG integration: rather than relying entirely on external ESG ratings and third-party methodologies, our investment professionals question potential holdings with low ESG ratings and contribute to a firm-wide debate.

Because our portfolio managers can own “risky” ESG companies, we are in a unique position to engage with those firms to drive changes that seek to reduce risk and enhance performance potential over the long term.

Other investors are looking to direct capital in such a way as to achieve extra-financial as well as attractive financial returns. This could be through negative screening or – increasingly – through positive screening that helps to create a broader social impact.

ESG in its different guises will be a significant investment theme in 2019 and beyond. To establish ESG investing as a mainstream activity, asset managers will need to be clear on labeling and how they can address clients’ differing needs and expectations.

4. Rising inequality is hurting economies and transforming politics.

The economic inequality that has been growing in societies around the world is a significant factor in driving anti-globalization sentiment, and it looks like the trend could get even worse. Inequality is a political issue that has helped spur the rise of nationalist and populist parties. It can also drag down growth, destabilize social systems and stress government budgets.

Rising inequality is bringing to the ballot box more voters who are disillusioned with the status quo, which could result in new policy proposals that further increase market volatility. Millennials are also set to become an increasingly powerful political force in the next decade – and as a demographic group, they are more likely to demand fairness, transparency and an understanding of how companies contribute to the greater good.

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As Global Strategist at Allianz Global Investors, Neil Dwane is responsible for presenting strategic house views and overseeing the Economics and Strategy Research teams.