Asset manager State Street Global Advisors (SSGA) believes US equities will benefit from the last vestiges of fiscal stimulus and strong consumer spending in the first part of 2019.
But opportunities are likely to shift to other regions and sectors in the second half of the year, depending on how policy tightening, trade disputes and geopolitical events play out in emerging markets and Europe.
Given the maturity of the current cycle, SSGA in its ‘2019 Global Market Outlook: Not over until it’s over’ report expects to see bumpier markets in 2019. It therefore suggests a more cautious return-seeking approach, with a diverse combination of defensive equities, high-quality credit and select emerging market exposures across equities, currencies and local currency bonds.
Geopolitical risks in Europe look set to weigh on stocks, especially in the UK as its departure date from the European Union draws closer. Political concerns will likely impact the euro and sterling amid EU budget disputes with Italy and continued Brexit uncertainty.
SSGA believes the guilt-by-association sell-off in emerging markets in 2018 has created some attractive buying opportunities, provided not all the risks already priced-in materialize in 2019. The country to watch will be China, which must balance continued economic growth with its growing debt burden and damage from US tariffs.
‘China matters most among emerging markets for global investors in 2019,’ says Rick Lacaille, global chief investment officer for SSGA, in a statement. ‘Not only is it an important driver of global growth, but it is also increasingly important to global markets as major emerging market equity and debt indices begin to include onshore Chinese securities.
‘Moreover, markets are only beginning to digest what a fundamental shift in relations between the US and China might mean for future growth.’
For fixed-income investors, caution and quality are the watchwords for 2019 as the US Fed continues to raise rates and drain liquidity as it unwinds its balance sheet.
Credit, therefore, warrants caution at this late point in the cycle, and SSGA continues to focus on higher-quality issuers. For fixed-income investors looking to take risk, the firm sees value opportunities in local currency emerging market debt and currencies.
Lastly, with US short-term rates moving higher, cash-like holdings appear more attractive than they have in years, and there should be opportunities to use short-term currency moves to make long-term strategic hedging decisions.
‘Given we expect higher volatility in 2019, investors may want to increase their dry powder,’ says Lori Heinel, deputy global chief investment officer for SSGA. ‘While the current cycle isn’t over until it’s over, building in strong defenses now should help navigate late-cycle volatility and uncertainty in the months to come.’