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US Federal reserve: The biggest risk factor for 2019

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An exclusive with Norman Villamin, CIO Private Banking at Union Bancaire Privée, on his projections for the year
9 months ago

What is your outlook for 2019 and what are the most striking risk factors?

2019 is going to be somewhat similar to 2018, we are expecting a fairly choppy market in the equity markets around the world. Multiples are probably fair to a little bit expensive from here, so investors are going to have to rely on earnings growth to drive returns, but unfortunately earnings growth are only going to come in mid-single digits or so, thus [we expect] very modest return expectations for the year.

I think the biggest risk factor that we see now is that the US Federal Reserve (Fed) and the other central banks around the world look like they are standing aside. Any chance they get back involved may primarily lead to an inflation at this point. We do not see it under the horizon but if that happens that is going to be a challenge for markets even with that modest return environment we expect.

Would US-China trade relations, or any other macro factors significantly impact investor sentiment for the region?

Yes, I think the trade issue remains a big concern worldwide. However, I think if there was a good outcome from the volatility for the year, is that it has woken up a lot of government leaders in the US and China in particular about the potential impact of policies affecting growth. Until we see both US and China stepping back from that confrontation, we think this is constructive.

I think investors must realise that this is something that goes beyond just trade. This is a much more strategic deal, than a political confrontation, so these issues will come back again especially in the run up to the 2020 US presidential elections which [will] really start to heat up in the second half of this year and first half of next year.

In light of the above, which asset class you think will be the winners this year and why?

I would say that two things are particularly attractive right now, we’ve been quite cautious on corporate credit for the last couple for years because you want to be, as an investor, compensated for the kinds of risks that you are taking.

Really for the first time in a couple of years, you are now especially in high quality bonds, investment grade bonds, so we think that is attractive and that is a change from going back a couple of years. I think the second thing outside of that, is in the emerging market as well as Japan. We see evaluations that are nearing 2008-2009 lows, we see this in a lot of countries.

We think this is certainly the case in Brazil, in Indonesia, as well as in India, where policy is moving from tightening to loosening, especially in the fiscal front, and we expect China to join them as we move through the year. That should create the factor backdrop for emerging market equities and emerging market debt through the year.

How do you think interest rates will affect liquidity movements this year and how will this impact emerging market debt?

We think the short end of the US dollar rate curve should stay fairly contained. We think there is one more rate hike out of the US this year. So that should not be the same as last year in terms of emerging market debt.

Where investors need to be cautious is paused by the US Fed, which likely means that the yield curve will steepen, and in turn means that longer dated bonds will perform more poorly than shorter dated bonds. Thus, we expect to manage those risks in our portfolios.

In your role as CIO what major challenges do you expect to face this year?

I think the biggest challenge is generating return. Again as we said, we think multiples are more attractive than they were six months ago but not cheap by any means. Earnings are going to be fairly modest so investors are going to have to tilt their focus from trying to drive return via capital gains and really focus on income dividend or what we like to call stock selection output, rather than looking to how the market is going up—” I’m going to making money”—it is going to be a more grounded out year. Roll up the sleeves in order to get that mid-semi-digit kind of return for 2019.

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